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Commissioner of Income-tax (Central) Vs. Chrestian Mica Industries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 153 of 1968
Judge
Reported in[1977]109ITR324(Cal)
ActsIncome Tax Act, 1922 - Section 10 and 10(2)
AppellantCommissioner of Income-tax (Central)
RespondentChrestian Mica Industries Ltd.
Appellant AdvocateS. Sen, Adv.
Respondent AdvocateNone
Cases ReferredRogers & Co. v. Commissianer of Income
Excerpt:
- .....of the case, the tribunal was right in holding that in any event no profit was earned by the assessee-company as a result of the said sale, and in directing accordingly the exclusion of rs. 4,21,023 and rs. 52,778 out of the assessee's total income?' 2. the assessee is a company and carries on business, inter alia, in mica mining. the assessment year is 1958-59. the previous year ends on december 31, 1957. rs. 7,19,726 was shown by the assessee as its total income, but the tax officer has determined it at rs. 30,42,624 by including two sums of money mentioned in the above questions as business profits arising out of the sale of those assets. the relevant facts found by the tax officer are as follows :(i) the assessee was promoted by ram kumar agarwala, a partner of m/s. ram kumar.....
Judgment:

Deb, J.

1. The following questions of law are involved in this reference under Section 66(1) of the Indian Income-tax Act, 1922 :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sale of plant and machinery by the assessee to M/s. Kariatari Mica Mining Co. Ltd. took place before the previous year and in excluding the sum of Rs. 52,778 out of the assessee's total income ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sale by the assessee of mines and mining rights to M/s. Kariatari Mica Mining Co. Ltd. did not amount to a venture in the nature of trade or a trading transaction and as such the sum of Rs. 4,21,023 was not assessable as business profit ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in any event no profit was earned by the assessee-company as a result of the said sale, and in directing accordingly the exclusion of Rs. 4,21,023 and Rs. 52,778 out of the assessee's total income?'

2. The assessee is a company and carries on business, inter alia, in mica mining. The assessment year is 1958-59. The previous year ends on December 31, 1957. Rs. 7,19,726 was shown by the assessee as its total income, but the tax officer has determined it at Rs. 30,42,624 by including two sums of money mentioned in the above questions as business profits arising out of the sale of those assets. The relevant facts found by the tax officer are as follows :

(i) The assessee was promoted by Ram Kumar Agarwala, a partner of M/s. Ram Kumar Agarwala and Bros., Elbridge Watson, the resident Director of Chrestian Mining Co. Ltd., David Mitchel, a senior partner of Lovelock and Lewis, a reputed firm of accountants, and Rowen Hedge; the senior partner of M/s. Orr, Dignam & Co., a well-known firm of solicitors;

(ii) M/s. Ram Kumar Agarwala & Bros. assisted several parties in promoting companies and earned brokerage which was taxed in their hands;

(iii) Ram Kumar Agarwala and Watson also promoted several companies with the assistance of Mitchel and the remuneration paid to Mitchelwas held to be taxable in his hands;

(iv) Ram Kumar Agarwala, MitChel and Hedge were also assessed for making a profit of Rs. 6 lakhs in connection with the sale of M/s. Swadeshi Cotton Mills Ltd., Kanpur, and they had to pay tax on that profit;

(v) The promoters of the assessee made huge profits by commercialising all sorts of transactions and they accumulated money in all conceivable ways;

(vi) Ram Kumar Agarwala & Bros. acquired all the shares of M/s. Chrestian Mining Co. Ltd. with the clear intention of making profit by reselling those shares and they transferred the fixed assets of that company to the assessee by making a profit of Rs. 32 lakhs which was assessed as business profits in their hands.

(vii) Between 1946 and 1953 M/s. Chrestian Mining Co. Ltd., sold its mining rights in four mines to the assessee for Rs. 46,92,192 and thereafter M/s. Chrestian Mining Co. Ltd. was wound up.

(viii) In 1955-56 the assessee-company floated five 100% subsidiary companies including M/s. Kariatari Mica Mining Co. Ltd.

(ix) In 1956, the assessee increased the value of its three mines by Rs. 33,36,728 and after retaining 194 square miles of the mining lands parcelled out the remaining lands in suitable sizes.

(x) The assessee sold those plots to those five subsidiaries by making a total profit of Rs. 33,60,370 out of which Rs. 4,21,023 was earned by the assessee in this assessment year which is the subject-matter of questions Nos. 2 and 3 before us.

(xi) In the accounting year 1956, the assessee also made a huge profit by selling certain plants and machinery to those subsidiaries,

(xii) In the accounting year in question the assessee also made a profit of Rs. 52,778 by selling certain other plants and machinery to M/s. Kariatari Mica Mining Co. Ltd., being the subject-matter of questions Nos, 1 and 3 before us.

3. It appears that the accountant of the assessee made the following submissions before the tax officer ;

'The business of the assessee consists in mica mining, manufacturing and sale. The mining rights and areas and plant and machinery under consideration were the assessee's capital assets. However, under Rule 35 of the Mineral Concessions Rules framed under the Mines and Minerals (Regulation and Development) Act, 1948, a maximum ceiling of 10 sq. miles was fixed on the holding of mining areas by any single person. Originally, this provision did not govern the leases granted before October 25, 1949. But under Clause 15 of the Mineral Concessions Development Rules, 1956, it was further provided that all the mining leases granted beyond that date would be brought into conformity with the new provisions. In 1956, therefore, for the first time a ceiling was imposed on the maximum holding ofthe assessee's mining rights far in excess of 10 sq. miles and it thought it necessary and expedient to float some 100 per cent. subsidiary companies and to transfer the excess mining areas to them. The real intention, therefore, was only to save the company from the clutches of the law without losing control over the capital assets in question. The profit earned, therefore, should not be held as a taxable revenue item.'

4. The tax officer, however, overruled the above contention in the following terms :

'Now, revaluing the assets, parcelling the mining areas in suitable sizes, floating new companies and selling the assets to them at a price even higher than the revalued cost, it will be noticed, are all operations, characteristic of ordinary trading in the line of business in which the venture was made. These are unmistakable indicia of trade attendant upon the assessee's organised operations which are only in fitness with the antecedents and intentions of the promoters and the assessee's objects as per its own memorandum of association. The assessee's explanation, therefore, that the only reason for the sale of the mines in question was the. fixing of ceiling on the holding of mining areas is not convincing. Firstly, had it been so, the assets could have been sold at their book value. There was no need to revalue them and then sell them at a still higher price. Secondly, even after sales in question, it is seen that the assessee-company continued to hold 1,24,111 acres, i.e., about 194 sq. miles of mining areas, which is far in excess of the ceiling prescribed. The assessee's eagerness, if any, to abide by the mining rules appears thus to have been too feeble to explain in all the elaborate course of operations resorted to by the assessee.

The only correct inference in the circumstances appears to be that the assessee merely took advantage of the changed circumstances created by the above rules and seized upon the opportunity to materialize its premeditated business plan. The sale of the assets in question thus represents only some of the last link in the long chain of a grand profit-making scheme well conceived, dexterously designed and successfully executed, or, for all one knows, these may not still be the very last links as all the five new companies again have in their memorandum of association a clause identical with the crucial clause of the assessee's memorandum of association discussed above.

I, therefore, hold that the profit of Rs. 4,21,023 earned by the assessee during the year in the sale of mines and mining rights to Kariatari Mica Mining Co. Ltd. is taxable under Section 10.....

For the same reasons as discussed above in connection with the sale of mines and mining rights, it is further held that the above profit of Rs. 52/778, earned on the sale of plant and machinery to Kariatari Mica Mining--Co. Ltd. is also taxable under Section 10 in the present accounting year.'

5. The Appellate Assistant Commissioner dismissed the first appeal filed by the assessee, but on second appeal the Appellate Tribunal deleted those additions. The relevant portion of the order of the Tribunal is as follows:

'The Income-tax Officer has gone on to discuss a lot of materials whichhas hardly any bearing on the point in issue before us. The company wasformed on 13th May, 1946, and the Income-tax Officer has relied on clause3(6) of the memorandum of association which is as under :

'to purchase, take on lease or in exchange, hire or otherwise acquire and to let out, hire and trade with any 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 lease, buildings, works, quarries, minerals, easements, machinery, plant, stock-in-trade, boats, vessels and rolling stock.' It is submitted by the learned counsel that this was merely an empowering object and as a matter of fact the company had no transactions of this nature, i.e., dealing in mining rights ever since its inception right up to the previous year. Even the circumstances of the sale were brought about by the exigencies of change in the mining laws. There was also a circumstance that the transfer of assets was to a 100 per cent. subsidiary of the assessee-company.

As regards the plant and machinery it was further stated that the agreement for sale was made on 31st October, 1956, and sale was completed on 4th January, 1957. It was submitted that so far as the plant and machinery were concerned, possession was handed over even before the previous year and it could not be said that the sale took place this year.

The transfer of assets to M/s. Kariatari Mica Mining Co. Ltd. was effected by the deed dated 4th January, 1957. Clause (d); inter alia, provides that the 'sale of the said immovable properties being the subject-matter of these presents shall be distinct and separate from the sale of the movable properties as aforesaid which are not the subject-matter of these presents shall be treated separately.....'

Clause (e) provides that 'all machinery, plants, implements and othermoveable properties, effects and things referred to above have already beendelivered by the vendor-company to the purchaser-company and the titlethereto is not intended to be passed by these presents or any recitalstherein.'

The consideration was fixed at Rs. 5 lakhs, in respect of which Rs. 6,000 had already been paid on 31st October, 1956. The consideration for the sale of plant and machinery was Rs. 1 lakh out of which Rs. 4,000 was paid to the assessee-company on 31st October, ,1956. The balance of Rs. 96,000 due in respect of plant and machinery, etc., and Rs. 4,94,000 inrespect of immovable properties, i.e., the total sum of Rs. 5,90,000 was to be satisfied as follows :

Rs. 3 lakhs to be paid in fully paid up ordinary shares of Rs. 10 each of the purchaser-company ; Rs. 75,000 within one year from 4th January, 1957; Rs. 75,000 within two years from 4th January, 1957; and Rs. 1,50,000 to be paid to the trustees under the trust deed dated 12th September, 1946,

We hold-

(1) that the sale of plant and machinery took place before the previous year; and

(2) that the transfer of the mining rights was not in the course of a venture in the nature of trade or in the course of a trading transaction (having regard to the circumstances under which the formation of the subsidiary companies had to be brought about); and

(3) that in any event on the basis of the decision of the Bombay High Court in the case of Rogers & Co. v. Commissioner of Income-tax [1958] 34 ITR 336 (Bom) and the Calcutta High Court in the case of Commissioner of Income-tax v. Mugneeram Bangur & Co. [1963] 47 ITR 565 (Cal), no profit was earned by the assessee-company as a result of this transfer. We, accordingly, direct that the two sums of Rs. 4,21,023 and Rs. 52,778 be left out of assessment.'

6. The submissions of Mr. Sen, the learned counsel for the revenue, before us are follows:

It has been admitted by the counsel for the assessee before the Tribu-nal that the sale of the plant and machinery was completed on January 4, 1957 ; there is no material on the record to support the submission of the counsel before the Tribunal that the assessee has made over possession of the plant and machinery before the previous year ; therefore, the conclusion reached by the Tribunal that these plants and machinery were sold before the previous year is erroneous in law ; the Tribunal has accepted the facts found by the tax officer but has brushed them aside by saying that they have hardly any bearing on the issues before it without giving any reason whatsoever ; the Tribunal has thereby misdirected itself in law, for it has failed to take into consideration the essential and relevant facts found by the tax officer in order to determine whether these transactions are trading transactions or are ventures in the nature of trade ; the conclusion arrived at by the Tribunal that those transactions are not trading transactions or ventures in the nature of trade is erroneous in law, for the Tribunal has solely relied on the circumstances under which the subsidiaries were brought into existence, but those circumstances are not the determining factors; and the decisions relied on by the Tribunal are no longer good law.

7. It is beyond dispute that the submissions made by the counsel has no evidentiary value, for he does not give any evidence but merely argues the case on the facts and the materials already on record. It has been held by the Supreme Court in the case of Commissioner of Income-tax v. Calcutta Agency Ltd. reported in : [1951]19ITR191(SC) of the report, that the submission of a counsel is not an evidence of a fact and the court cannot treat it as a fact. It is also well-settled that a fact admitted by the counsel is a substantive evidence against his client. As already stated, the counsel for the assessee admitted before the Tribunal that the sale of plant and machinery was completed on January 4, 1957. This admission is a substantive evidence against the assessee and the Tribunal did not apply its mind to it.

8. Further, no date relating to the delivery of possession of plant and machinery is given in the sale deed dated January 4, 1957. Hence, there is no material on the record to justify the conclusion arrived at by the Tribunal that the sale of plant and machinery took place before the previous year. In these circumstances, it must be held that the Tribunal has misdirected itself in law in determining the question.

9. It has been repeatedly held by the Supreme Court in numerous cases including the cases of G. Venkataswami Naidu & Co. v. Commissioner of Income-tax reported in 0065/1958 : [1959]35ITR594(SC) , Janakiram Bahadur Ram v. Commissioner of Income-tax reported in : [1965]57ITR21(SC) and Khan Bahadur Ahmed Allauddin & Sons v. Commissioner of Income-tax reported in : [1968]68ITR573(SC) that the Tribunal must take into consideration all relevant facts and circumstances on the record to ascertain whether a transaction is a venture in the nature of trade, because their total effect determines the true character of the transaction.

10. The Tribunal has failed in its duty to give reasons for brushing aside the aforesaid essential and relevant facts found by the tax officer, and that apart, the Tribunal has misdirected itself in law by ignoring those essential and relevant facts and the materials on the record in arriving at its conclusion. Clause (iii) of the purchaser's covenant in the deed of sale dated January 4, 1957, is in the following terms :

'The purchaser-company shall on and from the date of these presents and until payment of the said sum of rupees five lakhs ninety thousand in terms of paragraph 2 hereinabove pay to the vendor-company interest thereon or on such part thereof as shall remain unpaid for the time being at the rate of four and a half per cent. per annum, such interest to be paid-on the thirty-first day of December each year for the year immediately preceding the first of such.'

11. The above clause, the facts found by the tax officer and the materials on the record, in our opinion, conclusively show that these transactions areout and out business transactions and in any event are ventures in thenature of trade.

12. There is also no substance in the Tribunal's conclusion based upon thecircumstances under which these 100 per cent. subsidiaries wore broughtinto existence by the assessee, because, (i) the subsidiaries are independentlegal entities ; (ii) the asssesee retained more than 194 sq. miles of mininglands even after selling some of the mining lands to these subsidiaries (iii) the sale deed expressly provides for payment of interest to the assessee and (iv) the dominant and the sole intention of the assessee, from thebeginning to the end was to resell these properties at a huge profit asappears from the facts found by the tax officer and not reversed by theTribunal.

13. The Tribunal has arrived at the conclusion that no profit was earnedby the assessee as a result of those transfers by following the decisions inthe cases of Rogers & Co. v. Commissianer of Income-tax reported in : [1958]34ITR336(Bom) and Commissioner of Income-tax v. Mugneeram Bangur &Co.; reported in : [1963]47ITR565(Cal) . But these two decisions are nolonger good law on the question involved before us, for in the case of Commissioner of Income-tax v. B. M. Kharwar reported in : [1969]72ITR603(SC) , the Supreme Court has disapproved these two decisions and has heldthat on realisation-sale the excess over the written down value of the machinery not exceeding the difference of the original cost and written downvalue is liable to be brought to tax under Section 10(2)(vii) of the IndianIncome-tax Act, 1922.

14. In this view of the matter, we return our answer in the negative to all these questions and in favour of the revenue. We would also like to record here that the learned counsel, who had been briefed in this matter for the assessee, kept himself out of the court during the hearing of this reference.

15. In the facts and circumstances of the case, the assessee will pay thecosts of this reference to the revenue.

Pyne, J.

16. I agree.


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