P.B. Mukharji, C.J.
1. This is an income-tax reference under Section 66(1) of the Indian Income-tax Act, 1922. The question on which the answer of the Court is sought is as follows:
'1. Whether on the facts and in the circumstances of the case the Tribunal was justified in excluding the sums of Rs. 22,197, Rs. 1,88,417 and Rs. 73,327 from the total income of the assessee for the years 1953-54, 1954-55 and 1955-56.'
2. The facts giving rise to this question may now be briefly stated. The assessee Company was incorporated on July 3, 1920. The Company took overthe Zamindari properties pertaining to the Ukhara estate which belonged to Rai Pulin Behari Lal Singha Bahadur and the late Gostabehari Lal Singha. The Company took lease of the extensive zamindari pertaining to the Ukhara estate and it also took assignment of the movables, including G. P. Notes and jewellery belonging to the members of 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 4080 fully paid-up shares of the Company to the lessors. The quit rent reserved 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.
3. 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 a lease or otherwise acquire, take over or undertake the Zamindaries Putnees Talooks lands and properties belonging to Rai Pulin Behari Singha Bahadur and the late Gostabehari Singha otherwise known as Ukhara estates for such salami price or consideration and upon rents, terms and conditions as are set forth in the draft agreement referred to in Clause 3 of the annexed Articles of Association.
(b) to purchase, take on lease or otherwise acquire and to traffic in land house and other property of any tenure and any interest therein including Zamindaries, tenures, forests and plantations and fisheries and the rights of ferry and generally to deal in or traffic by way of sub-lease, exchange or otherwise with land and house property and forest and agricultural produce, timber, boats, rolling stock, machinery, cattle, fish and any other property, whether immovable or movable, and to encourage trade and traffic therein.
(d) to take licenses or leases to prospect search for win get and quarry any ore m'etal or mineral substance of ail kinds in any part of India.
(e) to carry on the trade or business of colliery proprietors, coal dealers, coke manufacturers, mica dealers, miners, smelters, engineers, lime burners and cement manufacturers in all their respective branches.
(f) to carry on all or any of the business usually carried on by companies owning or holding land in all their several branches and in particular to lay out and improve, alter and develop by draining, cleaning, road making or otherwise any property of the Company and thereon to erect and construct or assist in the erection and construction of any buildings or works whatsoever and to pull down, alter and rebuild any existing erections or buildings required by the Company.
(i) to develop and turn to account any land acquired by the Company or in which the Company is interested and to carry on the business of Zamindaries and landowners.
(k) to purchase, take a lease, or in exchange, hire or otherwise acquire movable and immovable property and any rights or privileges which the Company may think necessary or convenient, for the purpose of its business, and in particular any lands, buildings, works, ponds, tanks, wells, reservoirs, minerals, easements, machinery, plant, stock-in-trade, rolling stock etc.'
4. There are many other objects declared in Clause 3 of the memorandum. Clause 5 of the memorandum provides that
'the capital of the Company is Rs. 4,50,000 divided into 4500 shares of Rs. 100 each and upon any increase in capital the Company is to be at liberty to issue any new shares in priority to other shares, present and future, with any preferential, deferred, qualified or special rights, privileges or conditions as to dividends, votes or otherwise attached thereto.'
5. 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 mention that the Company was formed for the purpose of conserving the family assets and explain the origin and formation of the Company upto a point.
6. 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 compensation. The total amounts received by the assessee Company under these three heads (a) salami, (b) premia and (c) compensation, in these three accounting years were respectively Rs. 22,197/-, Rs. 1,88,417/-, and Rs. 73,327/-.
7. The Income-tax Officer rejected the contention of the assessee that the receipts were of a capital nature. He came to the conclusion that these were trading receipts arising out of the assessee's business in the leasehold rights. He therefore made the order including, these three amounts in the total income of the assessee Company as its business income. The assessee appealed to the Appellate Assistant Commissioner who reversed the findings of the Income-tax Officer. The Appellate Assistant Commissioner in reversing the Income-tax Officer's order then followed the decision of the Tribunal in the appeals filed by the Income-tax Officer against the assessee for the assessment years 1946-47, 1947-48 and 1948-49 being Income-tax Appeals Nos. 1720, 1721 and 1722 of 1959-60, respectively. The order of the Appellate Assistant Commissioner therefore was to exclude the amounts (a) Rs. 22,187/-, (b) Rs. 1,88,417/-and (c) Rs. 77,327/- from the total income of the assessee for the relevant years. The Revenue therefore appealed to the Tribunal. The Tribunal dismissed the Departmental appeals and upheld the order of the Appellate Assistant Commissioner excluding these amounts from the income of the assesses. In coming to that conclusion the Tribunal was moved by the following reasons and considerations. Repelling the Revenue's contention that the assessee was carrying on the business of taking leases and granting sub-leases for profits and therefore the amounts of salami, premia and compensation should be assessed as the business profits of the assessee Company, the Tribunal says that the assessee
'Company was primarily incorporated for the purpose of taking over the assets of the family for the good management of the family estate. The shareholders of the Company were all members of the family and the consideration for the lease amounting to Rs. 4,08,000/-was paid by the assessee Company by allotment and issue of shares to the coparceners of the family. The Company agreed to pay a quit rent of Rs. 100/- only to the family (besides the rent payable for the estate to the superior landlords) and therefore by granting the lease to the Company the family made a profit 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.'
8. 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,
9. 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 any business by acquiring the leases and grantingsub-leases'.
10. The third reason which the Tribunal puts forward is that the royalties paid to the assessee Company by its sub-lessees were assessed by the Revenue under Section 12 of the Income-tax Act, 1922 and the fact that such royalties were not assessed as business profits under Section 10 of that Act, itself goes to suggest that the Revenue authorities were of two minds on the point. The Tribunal on this point applied the authority in P. K. N. Co., Ltd. v. Commr. of Income-tax, Madras : 47ITR195(Mad) of the Madras High Court which has since been affirmed by the Supreme Court as Commr. of Income-tax, Madras v. P. K. N. Co., Ltd. : 60ITR65(SC) . We shall presently discuss these authorities.
11. Although the question appears to be innocent enough yet it has many complicated and troublesome aspects. It is noteworthy that although this Company was incorporated in 1920 yet practically for 25 years, from 1920 to 1946, the Revenue authorities never thought of taxing the sums realised as (a) salami, (b) premium and (c) land acquisition. The trouble started from 1946-47 when the Revenue wanted to tax these amounts.
12. The special features and facts of the present reference must at the outset be emphasized. The Profit and Loss account for the year ending 1953-54, to which reference has been made by the Income-tax Officer as having been filed by the assessee before him, shows that the total profit of this assessee Companywas Rs. 1,03,036-5-9. What is significant is large dividend amounting to Rs. 1,02,000 for each of these three accounting years was declared by the assessee Company whose rate learned counsel for the assessee and the Revenue assured us by reference to the Profit & Loss account and the balance-sheet to be at the high rate of 25%. It is a significant point for consideration in this reference how far this feature of declaration and payment of dividend make this Company a trading Company and its leasehold interest on lands its trading assets. No case or authority has been cited to us from the Bar nor have we been able to find any authority where the impact of this question of dividend on the point has been considered.
13. The next significant feature and fact of this reference is that there is a Reserve Fund proved by its balance-sheet and profit and loss account. Creation of a Reserve fund for this assessee Company is specially provided 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 aside 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.'
14. 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 dividend shall be declared than is recommended by the directors.
126. When in the opinion of the directors the position of the Company permits, interim dividends may be paid to the members on account of the dividends for the then current year.
127. The directors may deduct from the dividends payable to any member all such sums of money as may be due fromhim to the Company on account of calls, debts, liabilities or otherwise.'
15. From these Articles and from the fact of dividend having been declared and paid, it is clear that the assessee Company makes profits and declares dividends, a feature which distinguishes this reference from all the authorities cited from the Bar.
16. Having set out the special facts and features of the present reference, we shall now proceed to discuss the basic argument in this case viz., is it a family of co-owners or coparceners as landlords or landowners using their rights as owners of land in the garb of a Company or is it a business Company with objects of trading. Upon this crucial question will depend the ultimate answers to the question asked in this reference.
17. The assessee contends that this is a family of land-owners exercising original rights of ownership by making use of the land and earning an income although it works and functions in the garb of an incorporated Company. Incidentally, it is an assessee which is a private limited Company. The second contention of the assessee Company is that it has no business of taking leases because it has not taken any lease except the present one in the circumstances already mentioned. Thirdly, the assessee contends that as a Company it is not its business to run collieries and has not, in fact, run any colliery on its own. Fourthly, the assessee contends that this receipt from what it-has done is not a business profit at all. The assessee's argument is that as owner of the property it has only let out to lessees and sub-lessees and has earned rent, salami and premium and have recevied compensation for the land acquired. Lastly, it is the assessee's contention that the origin, growth and development of the Company are stamped with the only object and purpose of 'taking over the assets of the family for the good management of the family estate.'
18. Having regard to the statement of the case that during the accounting years the assessee Company granted several sub-leases for which it received 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., Kajora Coal Mines Ltd., were and arethe 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 or 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.
19. But the fundamental argument on behalf of the assessee Company is that this letting or granting of sub-leases was not done as a trade or a business but as owners of property and for the maintenance and preservation of the family and coparceners who constituted this assessee Company. It will therefore be necessary to examine this basic contention of the assessee whether the object was of family maintenance or of trading. Before we proceed to a detailed examination of this point it will be appropriate to say that trading and family maintenance can equally co-exist and it may not be possible to separate the one from the other i.e., family maintenance from the trade in such a manner as to separate the sheep from the goat. This is an aspect of some importance, for in India joint family businesses have turned into limited companies and landlords into industrialists. In this era of transition in India it may well be said that this branch is crossing through the twilight frontier between feudalism and industrialisation. This inter-penetration between the landlord's rights over the land as owner and his rights as the member or shareholder of a Company in the use of such land creates many factual and legal complications which will be seen from the decided cases which we shall presently analyse
20. The considerations which militate against treating this private limited company as a purely family affair for the maintenance of the family and the preservation of the family assets in order to exclude it from being a trading concern should now be examined. First, the objects of the Company appearing in the memorandum of the assessee are clearly commercial and trading in their character and import. They expressly say that the object is to 'traffic' in land and to 'traffic' by way of sub-lease and to encourage 'trade and traffic' therein. See these expressions in Clause 3(b) of the objects clause of the memorandum. It is also an expressly declared object of the assessee to carry on the trade or business of colliery proprietors, coal dealers (see Clause 3(e) of the objects clause of the Memorandum of the assessee). The otherclauses which have already been cited atthe beginning of this judgment leave little room for doubt that it is a trading Company. Secondly, if this Company was intended only for preservation of the maintenance of the family and the preservation of the family assets, then the question arises whether actually and in fact this is what the Company does. We find it 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 facie be said to be for the preservation of the family assets or the maintenance of the family. We are leaving aside the other considerations of Hindu Law in this connection, such as, rights of residence and rights of Hindu widows in the joint family which will create more complications in the Company concept and for which there is also no provision made in the Memorandum or in the Articles: (b) The declaration of dividends and the creation of profits and the payment of dividends out of such profits. A family or an individual owner of land or a group of such owners do not declare dividends. Declaration of dividends out of profits would therefore indicate that this is a trading concern and not a mere family concern exercising rights of members of family over their own lands as owners by granting sub-leases to colliery companies; (c) The terms and conditions of the creation of the reserve fund under the specific Articles which we have already quoted would also indicate that this is a trading Company trading and trafficking in granting sub-leases and making an income therefrom by rents, royalties, salamis and premia. Normally the verynotion of a reserve fund under the Company management of this nature is for expansion and development and reading Article 124 of the Articles of this assessee such a conclusion is justified that it is so in this case; (d) ordinarily the formation of a company is intended for trade and commerce and for earning profit and income. The twenty-first edition of Palmer's Company Law at page 3, Chapter 1 puts forward this concept by saying,'the Company limited by shares is undoubtedly the most important legal form of business organization; in its various forms it is adopted by all kinds of business large and small'and again at page 20, 'the Companies Acts place a very great variety of forms of Company at the disposal of businessmen'. Ordinarily a Company including a private limited company under the Companies Act is not a family institution or organization to exercise rights of ownership but primarily and fundamentally for carrying on trade, business or commerce and for earning profit. Apart from this basic concept of a Company for the purpose of trading, certain sections of the Companies Act, 1956 are also illustrative of this idea. For instance, the expression 'carrying on business' in Section 11 of the Companies Act, 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 of 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, religion, charity or any other useful object and which intends to apply its profits, if any, or other income in promoting its objects and to prohibit the payment of dividends to its members. Obviously the present assessee Company cannot claim that it is a company for the promotion of religion or charity or art or scienceand in any event far from prohibiting payment of dividends to its members it allows payment of dividends by its Articles and has in fact done so.
21. Section 25(6) of the Companies Act provides that it shall not be necessary for a such a Company under Section 25 to use the word 'limited' or the words 'private limited' as any part of its name unless its Articles otherwise provide. This assessee Company however, does not come within this concept because it is a private limited company and is designated and registered as such under the Companies Act, 1956. Because it is a private limited company, naturally transfer of shares is restricted under the usual law on that point.
22. On these considerations we are (Unable to accept the conclusion of the Tribunal that this Company being formed for the taking over of the assets of the family and for the good management of the family estate and because its shareholders to start with were the members of the family, cannot or could not be a trading concern in the particular facts and circumstances of this reference. We are also unable to agree with the conclusion of the Tribunal that only the fact that the Company agreed to pay a quit rent of Rs. 100 only to the family besides the rent payable for the estate to the superior landlords was enough to hold that the Company was formed for the better management of the family. The Tribunal apparently forgot to notice the outstanding feature of this Company of payment of annual dividends out of profits made by this Company and at a rate profitable enough to be 25 per cent.
23. This will be the proper stage to consider some of the decided authorities on this point. The case on which strongest reliance was placed by Mr. Burman, learned counsel for the assessee, is P. K. N. Co., Ltd. v. Commr. of Income-tax, Madras, a decision of the Madras High Court in : 47ITR195(Mad) and affirmed by the Supreme Court in : 60ITR65(SC) as Commr. of Income-tax. Madras v. P. K N. Co., Ltd. The partners of a firm called P. K. N. formed a private company and transferred to that company their properties situated in Malaya which properties consisted of several acres of rubber and cocoanut plantations which did not form a compact block and also vacant sites and houses. The Company sold some of these properties and this 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 con-troverted 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 doing so in pursuit of a business of dealing in properties. The emphasis in the decision of the Madras High Court was, (1) where dealing in properties is stated to be one of the many objects of a company that may create an initial presumption that the course of dealing was in the nature of a business, (2) but nevertheless before profits made by the Company could be taxed, it has to be found that the Company actually engaged itself in the business of dealing with properties and such a finding could not rest solely on one of the many objects stated in the memorandum but must rest on other indicia attendant upon the course of the business engaged in by the Company. In our case a very significant index is the payment of dividends and the creation of a reserve fund two factors which were absent in the P. K. N. case. When this P. K. N. case came up to the Supreme Court, : 60ITR65(SC) , the Supreme Court emphasised certain particular facts. They were that the primary object of the Company was to take over the assets of the firm, to carry on the business of planters and to earn profits by the sale of rubber but the acquisition of the estates was not for the purposes of carrying on business in real estate. It also emphasised the fact that the incidental sale of uneconomical or inconvenient plots of land could not convert what was essentially an investment into a business transaction in real estate. There is no such feature in the present reference before us and far from the sub-leases being uneconomical and inconvenient, the facts in the particular reference before us show that they were highly profitable and which yielded dividends at the rate of 25 per cent per annum on the shares and with fairly large profits. The Supreme Court also emphasised the principle thatthe question whether in purchasing and selling land the taxpayer enters upon a business activity has to be determined in the light of the facts and circumstances of each case and it was observed that the purpose or the object for which it was incorporated where the taxpayer was a Company might have some bearing but was not decisive, nor was the circumstance that a single plot of land was acquired and thereafter sold is decisive. In fact, the Supreme Court said that even profit motive in entering into a transaction is also not a decisive factor. Mr. Burman has used this authority to support his arguments for the assessee 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, those factors were not relevant or cogent for purposes of consideration and ultimate decision on this point. We need only quote the observations of Finlay, J. in St. Aubyn Estates Ltd. v. Strick (1933) 17 Tax Cas 412 at p. 419 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 purchase, it did in fact develop, it did in fact sell and it did in fact make profits by selling. When one looks at all those circumstances. I think it is impossible to say that they do not constitute evidence upon which a Tribunal of fact might arrive at a conclusion that here there was a trade being carried on'. In fact, Shah, J. who was delivering this judgment for the Supreme Court summarised the law that was enunciated by this decision at p. 73 (of ITR) ; (at p. 1260 of AIR) in these terms: 'These cases merely illustrate that the nature of the transaction must be determined on a consideration of all the circumstances, and the fact that a transaction is within the powers of a trading Company is relevant but has, standing alone, not much significance.'
24. On the other side for the revenue, Mr. Pal however relies on another Supreme Court decision in Karanpura Development Co., Ltd. v. Commr. of Income-tax, West Bengal : 44ITR362(SC) . That case also has many similarities with the present reference before us. There the assessee was a company. It had objects of acquiring and disposing of underground coal mining rights in certain coal fields and the objects also enumerated other works 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 subleasing them to collieries and other companies. In that case 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. There also the assessee realised salamis as in the present reference before us. The question there was also whether the amounts received by the assessee as salami for granting sub-leases constituted a trading receipt in its hands and the profits therefrom was assessable to tax under the Indian Income-tax Act, 1922. The Supreme Court in that case came to the conclusion that the transactions of acquiring leases and granting sub-leases were in the nature of trading within the objects of the Company and not enjoyment of property as land-owner. There was no sale of its fixed capital at a profit. In acquiring the head leases and granting the sub-leases, the assessee Company carried on a business and the amounts received by way of salami were trading receipts and the profits therefrom were liable to income-tax.
25. The essential principle and ratio of that decision on this particular point of distinction 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 p. 377 (of ITR) = (at P. 438 of AIR):--
'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 using them as property but selling them or turning them to account even by way of leasing them out as an integralpart of its business, cannot be said to treat them as land-owner 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 see not to the form which it Rave to the transaction but to the substance of the matter.'
2G. The Supreme Court by those observations expressed the principle in a nutshell. It is not the form but the substance of the matter which has to be examined. On a question like this, it has to be analysed what exactly the Company is doing. No one particular feature may be decisive but the total effect of different considerations should be borne in mind. Again, the Supreme Court after discussing authorities on the point in that case observed at p. 370 (of ITR) = (at p. 434 of AIR) as follows:
'* * * the deciding factor is not ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. The objects of the Company must also be kept in view to interpret the activity.'
27. It would, therefore, be wrong to say as Mr. Bunnan for the assessee tried to suggest that the objects of the Company were not relevant. They 'are relevant but they may not be decisive in a particular case.
28. The Supreme Court decision in : 44ITR362(SC) , is also relevant and significant on the point for decision we have in the present reference in other ways. Reliance had been placed by Mr. Bunnan for the assessee on the Privy Council decision in Kamakshya Narain Singh v. Commr. of Income-tax ), specially in connection with the distinction between sums received as royalties and salamis. Mr. Bunnan relied on the observations of the Judicial Committee at p. 519 (of ITR) ; (at p. 156 of AIR) where it was said:
'The salami has been, rightly in their Lordships' opinion, treated as a capital receipt. It is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. That general right may be properly regarded as a capital asset and the money paid to purchase it may properly be held to be a payment on capital account.'
In explaining those observations of the Privy Council the Supreme Court observed at p. 369 (of ITR) = (at p. 433 of AIR) as follows :--
'In that case the general right, in effect, was sold by the proprietor of theestate. In his hands as a land-owner, the coal bearing lands were properties and when he sold the right to the lessees to enjoy the benefits, he sold his property but he was not doing business. The proprietor parted with the general right, but in his hands it was not the stock-in-trade of any business. In his hands the lands are 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, the profit so gained may ultimately he considered as the profit of business.'
29. 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 leasehold 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 : 44ITR362(SC) is relevant which is in the following terms at P. 368 (of ITR) = (at p. 432 of AIR):
'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 it into some other form of capital or money. Fixed capital is something which the owner keeps in his possession but turns to profits; circulating capital, however, is turned over in the process of profit making. It may sometimes happen that in the process of production, fixed capital may be consumed or wasted, but that is a reduction of capital and not an expenditure in the business claimable as an allowance in the reduction of the assessable income in the shape of profits of the business.'
30. In this connection, the celebrated observation of Romar, L. J. in the Golden Horse Shoe (New) Ltd. v. Thurgood (1934) 18 Tax Cas 280 at p. 300 should be noticed:--
'Unfortunately, however, it is not always easy to determine whether a particular asset belongs to the one category or the other. It depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be circulating capital. A chattel or a chose in action may be a fixed capital. The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land withwhich a dealer in real estate carries on his business is part of his circulating capital.'
31. In the facts of the present reference before us there is no escape from the conclusion that the circulating capital of this company is the sub-leasehold rights in these lands when the company was using them to earn income, rent, royalty, salami and premium. That was 'trafficking' in land and sub-leases within the meaning of the objects clause of this assessee company.
32. The question raised in this reference relates to the total amounts received by the assessee as salami, premia and compensation. These three concepts of salami, premia and compensation are relevant on the controversy between the capital and revenue receipts. Having regard to our decision that this company is a trading company and that its assets are trading assets which it is using to earn income, the character of salami, premia or compensation has lost much of its importance. But even then it will be necessary to discuss the law and the authorities on this point.
33. On behalf of the assessee, Mr. Burman has relied on certain decisions to support his argument that salami is always a capital receipt. It is not like rent or royalty. In Board of Agricultural Income-tax, Assam v. Sm. Sindhurani Chaudhurani : AIR1957SC729 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 p. 733:--
'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 70 Ind App 180 at p. 190 = (AIR 1943 PC 153 at p. 156) 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 decision, : 44ITR362(SC) also noticed that observation and which we have already cited. In Sindhurani's case, : AIR1957SC729 the Supreme Court also noticed the decision of Harries, C. J. in Province of Bihar v. Pratap Udal Nath Sahi Deo, ILR 20 Pat 699 at p. 722 ; (AIR 1941 Pat 289 at p. 294) (SB) corresponding to : 9ITR313(Patna) . There Harries, C. J. observes in thereport of the case in : 9ITR313(Patna)
'Salami may in certain cases be regarded as payment of rent in advance and in such cases the salami could rightly be regarded as income. Where, however, salami cannot be regarded as payment of rent in advance, it cannot be regarded as income and would, therefore, not be taxable. In the present case as I have stated, no facts are given relating to any particular payment of salami. It is for the income-tax authorities to show that there do exist facts which would make the salami income. Prima facie, salami is not income, and it is impossible upon the facts as stated to say that the salami received by either assessee in this case constitute part of their income and, therefore, assessable to agricultural income-tax.'
The tenor of this decision appears to be that it is not an absolute proposition of law that salami is always a capital receipt and not a revenue receipt. The question will depend in each case on the nature of the salami. If it is an advance payment of rent, then it is taxable. But if it is a price for parting with the right of the landlord or of the zamindar, then it necessarily is a capital receipt. It is, therefore, necessary for the Tribunal in such cases to be very careful on the finding of fact when questions of salami arise to analyse the nature of the salami and to find out whether it is an advance payment of rent or not. Prima facie, the onus is on the revenue authorities to bring an amount within the notion of income before it can be assessed to tax and, therefore, salami as such will not be taxable unless it is a salami in the nature of an advance payment of rent. Salami is a very generic term and covers a multitude of concepts. Therefore, it is all the more necessary in each case of salami to find facts to determine what was the salami for and what was its nature. The other decision on which Mr. Burman for the assessee relied is Maharaja Chintamani Saran Nath Sah Deo v. Commr. of Income-tax, Bihar and Orissa : 41ITR506(SC) . In that case the assessee received certain amounts for four licences granted to different parties to prospect for bauxite and the periods of the licences were six months in two cases and one year in the other two. Under those licences the licensees were granted the right to enter upon the land to prospect, search and mine, quarry, bore, dig and prove all bauxite lying in or within the land and for that purpose the licensee had the right to dig pits, shafts, borings and to remove, take away and appropriate samples and specimens of bauxite in reasonable quantities not exceeding 100 tons inthe 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 grant 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 p. 512 (of ITR) = (at p. 736 of AIR): 'The question which has to be decided is what was the nature of the transaction.'
34. 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 is a transfer of a right to enjoy such property, made for certain time, express or implied, or in perpetuity, in consideration of a price paid or promised etc.'
That price is called the 'premium' under the Transfer of Property Act. Section 74 of the Bengal Tenancy Act which has some relevance to the present reference declares all impositions upon tenants under the denominations of abwab, mathat or other like appellations, in addition to the actual rent, to be illegal and all stipulations and reservations of the payment of such shall be void. It does not, however, mention premium unless it is something in addition to the actual rent which is rendered illegal within the meaning of Section 74 of the statute just quoted. These definitions, however, are not helpful for the present purpose and we do not need to pursue them any further,
35. But there is one point of definition which Mr. Pal for the Revenue tried to make and that was that all these cases were really cases of landlords and owners of properties where this question of salami and its character were discussed. The present case is from that point of view different. Once it is held, as we have held, that the Company is a trading company and it is using trading assets, then making an income by the use of such trading asset even though in the name of salami or premia would necessarily be revenue and not a capital receipt and that finding, which we have arrived at, is not parting with the capital asset at all but is using a trading assetto earn an income which is called by the name of salami or premium. It is a business of this assessee Company to earn salami or premia by the use of its lease hold rights by the grant of sub-leases to make this income. This in our view is plainly indicated by the decision of the Supreme Court in : 44ITR362(SC) and by the observations of Romer L, J., quoted above where it was pointed out, a land could be a stock-in-trade and a circulating capital. We have arrived at the conclusion that the assessee's rights in land in this case are such a stock-in-trade or a circulating capital for this assessee Company.
36. The only other concept that remains to be discussed is the concept ofcompensation. As already indicated here a certain amount of money in this case was compensation received by the assessee Company by reason of the acquisition under the Land 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. Commr. of Income-tax, West Bengal : 19ITR406(Cal) corresponding to : 19ITR406(Cal) held that where an assessee received a price or 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 Shanmugha Raje-swara Sethupathi v. Income-tax Officer, Karaikudi : 44ITR853(Mad) . There the estate of an assessee was taken over by the Government under the Madras Estates (Abolition and Conversion into Ryotwari) Act and a certain sum was paid by way of advance compensation to the assessee. The Madras High Court came to the conclusion that the interim payment of compensation cannot retain the character of income from the estate in spite of the fact that its quantum was determined in relation to the net annual rent or income. The conclusion of the Madras High Court was that this receiptwas of a capital nature and not liable to income-tax, This was, however, not the case of an acquisition of a trading asset of a company as in the present case before us but it was the acquisition of the land belonging to a zamindar. Similarly the Assam High Court in Raja B. N. Bhup v. Commr. of Income-tax, Assam came to the conclusion that interim annual payments made under Section 20(2) of the Assam State Acquisition of Zamindaries Act to the outgoing proprietor was capital receipt and not an income or revenue receipt. This was also the case of the acquisition of the land belonging to a zamindar and not acquisition of a trading asset belonging to a trading Company. The Nagpur High Court in Commr. of Income-tax, M. P. & Bhopal v. N. J Naidu had occasion to deal with the case of an assessee carrying on the business of exhibiting cinema pictures at theatres held on lease of the premises for a period of ten years. There the assessee had equipped the premises with machinery and furniture and carried on his business there. Before the expiry of the lease the premises was acquired for the Nagpur Improvement Trust and the assessee was paid certain sum in cash by way of compensation for determination of the lease which was in addition to a certain sum payable to the owner of the premises. On these facts the Nagpur High Court came to the conclusion that payment to the assessee was a solatium for the compulsory acquisition of his rights under the lease and therefore compensation for the loss of capital assets and not income and therefore not liable to tax. As will be seen from the observations at p. 226 (of ITR) : (at p. 275 of AIR) of the report, there the Nagpur High Court came to the conclusion that it was a capital asset and therefore the conclusion was inevitable? that the compensation was capital and not revenue receipt. Here, however, on the facts we have found that this is not a capital asset 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. Commr. 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 thepresent 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.
37. The problem in the present reference before us is more akin to the principle laid down in the House of Lords decision in Commr. of Inland Revenue v. Newcastle Breweries Ltd. (1927) 12 Tax Cas 927. In that case, rum was acquired by the Admiralty under a compulsory acquisition and there was no doubt that the transaction was in the nature of a compulsory acquisition though eventually the amount which the Government was to have to pay was fixed in a certain proceeding. It was, nevertheless, held there that the sum received was a profit arising from the Company's trade. While the trading Company uses its trading assets, and the sub-leasehold interest for, the trading assets of the assessee Company in this case, then their acquisition must necessarily mean revenue for the trading Company. Such a compensation even though it is a compulsory acquisition can no longer be a capital receipt.
38. Before we conclude, we need only make a bare reference to another decision of the Patna High Court in Traders and Miners Ltd. v. Commr. of Income-tax, Bihar and Orissa : 27ITR341(Patna) , to which reference was made on behalf of the assessee. There in that case the assessee let on lease for 99 years a portion of a zamindari acquired by it relating to surface rights together with mica mines located in that area and the consideration for the lease was the payment of a salami and a reserved rent per year. The Patna High Court came to the conclusion that the lease was a transfer of a capital asset within the meaning of Section 12-B of the Income-tax Act and the accounts arising therefrom were rightly taxed as capital gains. There again it was a case of zamindar getting a compensation on the acquisition of his land by the Government and it has to be distinguished from the present reference where we have come to the conclusion that the assessee is a trading Company dealing with its trading assets.
39. For these reasons and the authorities discussed above, we hold that the Tribunal was not justified in excluding the sums of Rs. 22,197, Rs. 1,88,470 and Rs. 73,327 from the total income of the assessees for the years 1953-54, 1954-55 and 1955-56. We answer the question in the negative in favour of the Revenue. No order as to costs.
T.K. Basu, J.
40. I agree.