1. The question referred In this case is whether the sums, received by the assessee company as selami for granting sub-leases of coal-mining leases which it had itself obtained, were trading receipts in its hands and whether the profit contained therein, it any, is assessable under the Indian Income-tax Act. The question has arisen out of the income-tax assessment of the assessee for the years 1949-50 and 1950-51 and its business profits tax assessment for the chargeable accounting periods ending on 31-12-1948, and 31-3-1949, respectively. The single question referred is common to all the four cases and consequently a single Reference has been made.
2. On an ultimate view, the facts of the case are fairly simple, but their history is somewhat long. It appears that on 26-3-1915, a firm of the name of Bird and Co., acquired from the Court of Wards, representing the proprietor of the Ramgarh Estate, a prospecting licence with respect to an area, called the Karanpura coal fields. The terms of the licence were slightly modified in 1917, but the modifications are in no way material for our present purpose. The licence was granted in consideration of a premium of rupees one lac and at an annual rent at a varying rate from the second year and the right it conferred was the sole and exclusive right to enter into and upon the coal fields and to examine, explore, prospect, search for, mine, quarry bore, dig, and prove all or any of the mines, veins, beds and seams of coal lying within or under the coal fields or any part thereof. Shortly stated, it authorised Messrs. Bird and Co. to search for coal in the area concerned and to do all things necessary for finding the substance. Another, term which is more important for our present purpose, gave to the licensee an option to take a coat-mining lease or coal-mining leases of the coalfields op parts thereof on certain stated terms. The terms were that the proprietor was to get selami at the rate of Rs. 40/-per standard bigha of 14,400 sq. ft. in respect of the coal lands comprised in the lease and further, that he was to get royalties for every ton of coal and coke raised, manufactured or despatched from the demised premises at varying rates. He was to get 4as. per ton on steam coal, 3 as per ton on rubble coal, 2 as. per ton on dust, 8 as. per ton on hard coke and 6 as. per ton on soft coke. The lease or leases would also have to provide for a minimum royalty of a certain amount.
3. The licence was transferable. In 1920, the assessee company before us, the Karanpura Development Company Limited, was incorporated for various purposes which I shall presently mention, but one of the main purposes was to carry into effect an arrangement with Messrs. Bird and Co., to take over their prospecting licence. A specific reference to this agreement was made in Clause 3(1) of the Memorandum of Association of the Company where it was described as 'the agreement referred to in Article 3 of the Company's Articles of Association,' The Articles were produced before us and we were shown what the agreement was. In pursuance of that agreement, the company obtained an assignment of the prospecting licence from Messrs. Bird and Co., by a registered indenture, dated the 30th May, 1921.
4. It will be convenient at this stage to set out the objects material for the present purpose, for which the company was formed, as set out in its Memorandum of Association. They are as follows:
'The objects for which the company is establish, ed are:
1. 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 in the Province of Bihar and Orissa at such price or prices for such period or periods and generally upon such terms and conditions as the Directors may determine and for that purpose to adopt, enter into und carry into effect all contracts, agreements and other documents and in particular to enter into and carry into effect, with or without modifications, either before or after the execution thereof the agreement referred to in Article 3 of the Company's Articles of Association.
2. To sell, dispose of and otherwise deal in all such underground coal mining and relative rights upon such terms and conditions as may appeal for the benefit of the Company.
3. To carry on the trades or businesses of colliery proprietors, coal merchants, miners, smelters, engineers, limeburners and manufacturers of brick, lime, coke and other bye-products of coal in all their respective branches.
6. To prospect for, crush, win, get, quarry, smelt, calcine, refine, dress, amalgamate, manipulate and prepare for market coal, ore, metal, and mineral substances of all kinds and to carry on any other prospecting, mining or metallurgical operations which may seem conducive to any of the Company's objects and to by sell, manufacture and deal in minerals, plant, machinery, implements, conveniences, provisions and things capable of being used in connection with prospecting, mining or metallurgical operations or required by workmen or others employed by the Company.
34. To acquire by purchase, lease, exchange or otherwise lands, buildings and hereditaments of any tenure or description and any estate or interest therein and any rights over or connected with land and either to retain the same for the purpose of the Company's business or to turn the same to account as may seem expedient.
52. To sell, improve, manage, develope, exchange, lease, mortgage, dispose of, turn to account or otherwise deal with all or any part of the property and rights of the Company.'
5. I have already stated that under the terms of the prospecting licence, the licensee had an option to take coal-mining leases from the licensor. It has been found that in exercise of that option, the assessee company took, from time to time, coal mining leases of diverse areas, amounting in the aggregate to 20,000 standard bighas. But although it took leases, it never carried on any mining operations for the purpose of extracting coal from the collieries and limited its activities to prospecting. The coal-mining leases were obtained only to be passed on to sub-lessees. What the assessee company did was to carry on prospecting operations and as soon as it spotted coal in any particular area to develop it as coal-field in all necessary ways, such as providing for means of communication, and then to sub-lease it to some other company formed for the purpose. This, it has been found, was done by the assessee company from time to time. The functions in which the assessee company engaged itself may, therefore, be described thus. It went on exploiting the licence by way of prospecting for coal. As and when it discovered coal in any particular place, it developed that area into a coal field and then after obtaining a mining lease with respect to it from the licensor, immediately sublet it to some other company which carried out the actual mining operations. The functions were thus limited to prospecting; making up a coal field as and when coal was found at any particular place, obtaining the necessary head-lease from the licensor and then letting out the lease. The whole round of the activities of the assessee company consisted in the performance of only such functions.
6. The subletting was at a profit. The method followed by the assessee company in obtaining and subletting the leases was that, for itself, it took a lease for 999 years and then, it sublet that lease for the same period, less a few days, so that in the event of forfeiture or a surrender of the sublease, it might have a reversion of the head lease-to itself. The profit at which the leases were sublet was fairly considerable. As against a selami ot Rs. 40/- per bigha which it paid to the licensor the assessee company realised Rs. 400/- per bigha from its sub-lessees and as against royalties at varying rates on different kinds of coal, ranging from 2 as to 8 as per ton, it realised from its sub-lessees royalties at the uniform rate of 8 as per ton for all kinds of coal. There was thus an excess in respect of both selami and royalty. No question arises in the present Reference as respects the royalties. The Tribunal has placed it on record, both in its appellate order and in the Statement of Case, that on behalf of the assessee company it was admitted that the royalty receipts were business receipts In the hands of the assessee and that the profit contained in them was properly chargeable to tax. The only dispute raised was with respect to the selami receipts. It was contended that those receipts did not constitute trading or business receipts at all and that with respect to them, the assesses company's position was in no way different from what the Raja of Ramgarh's position would be, if he had retained the property in his own hands and granted coal-mining leases to third parties as the proprietor of the coal fields.
7. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal have all concurrently held that the selami receipts were trading receipts in the hands of the assessee company. The assessee did not accept that decision and required the question to be referred to this Court. Accordingly, the following question has been referred:
'Whether, on the facts and in the circumstances of the case, the sums received as salami by the assessee for granting sub-leases were trading receipts in its hands and the amount of profit therein is assessable under the Indian Income-tax Act?
8. The answer to the question must depend on whether or not, in exploiting the prospecting licence by way of obtaining coal mining leases from the licensor and then sub-letting such leases at a profit and doing so again and again and performing only that function besides carrying out prospecting operations, the assessee company was carrying on a business. In my view, the answer to that question is plain. It is necessary first to remember that the assessee is a company formed for the purpose of carrying out certain declared objects. The next thing to see is what the objects are. I have already referred to those which are material and need not repeat them in extenso, but I would point out that under Clause 3 (1) of the Memorandum of Association, two of the company's objects are to purchase or acquire from the owners or proprietors thereof underground coal mining and relative rights of and in the Karanpura coal fields and, secondly, to enter into and carry into effect the agreement with Messrs. Bird and Co. The second object I have just mentioned means, that it was going to be one of the ventures of the company to take over the prospecting licence from the firm and to exploit it according to its terms which included obtaining of coal mining leases from the proprietors with the right of sub-letting such leases'. Another object recited in Clause 3 (2) of the Memorandum is to sell, dispose of and otherwise deal with all underground coal-mining and relative rights on such terms as may appear beneficial to the company. Yet another object is to acquire by, inter alia, purchase or lease any rights over or connected with land and turn the same to account as may seem expedient and a fourth is inter alia to sell or lease and turn to account or otherwise deal with all or any part of the property and the rights of the company. These objects, to my mind, make it perfectly clear that the company was not being formed as a property company, intended only to acquire property as capital assets and enjoy such income as the property might, in itself, yield. The object was clearly to embark upon business operations of a very extensive kind, consisting in prospecting for coal, developing coal fields in areas where coal was discovered and then, to refer to some of the objects which I have not yet mentioned, carrying on trades or businesses of colliery proprietors, prospecting for, cutting, refining and preparing for market, coal and also selling or leasing out the properties of the company. It is true that all the objects set out in the Memorandum were not actually pursued, as it happens in the case of every company, but the objects which were actually pursued appear to me to bo nothing but business objects. It has, however, to be seen whether the pursuit was in actual fact in such a form that a business can be said to have been carried on.
9. I have already summarised the main functions performed by the company. The prospecting operations carried on by it have been continuous. The object for which those operations have been carried on has been to discover coal. The object of discovering coal has been to develop the area concerned into a coal field. The object of so developing the area has been to obtain coal-mining leases from the licensor and the way in which the coal-mining leases have been utilised has been to let them out to third parties at a profit and then to turn to prospecting other areas, developing other coal fields, obtaining other leases and granting other sub-leases.
10. It seems to me impossible not to hold that the assessee company was carrying on business operations. The decisions of the courts in regard to them a business is carried on in such cases seem to be all one way and they accord with what one's ordinary notions of business suggest. In the case of Commissioners of Inland Revenue v. Korean Syndicate, Ltd. 1921 3 KB 258, a company was formed with the principal object of acquiring and working concessions and turning them to account. 'It entered into an agreement to lease a concession which it had acquired in consideration of the lessees making payments which were described as royalties, but which were, in fact, percentages based on profits which the lessees might make. I do not say that on the facts that case can be relied on as a precedent, for the Court of Appeal held that the agreement could hardly be called a lease, seeing that the consideration was computed on a percentage of the profits of the so-called lessee. But there are certain observations of a general character which, to my mind, are pertinent. The Court held that the company was carrying on the business for which it had been incorporated, namely, the business of acquisition of concessions and the turning of the same to account and in arriving at that conclusion, it laid down a test which one had to apply in judging whether or not a business was being carried on. Lord Sterndale M. R. pointed out that what might not be business, if carried on by an individual, might yet be business, if carried on by a limited company and that it was not correct to say that between a company and an individual, there was no difference. The difference was that a limited company came into existence with some particular purpose in view and if that purpose was a business purpose, and it was that purpose which it actually carried on, it was a very important factor in deciding whether, in doing what it was doing, the company was or was not carrying on a business. The Master of the Rolls, as well as the Lord Justices sitting with him, all held that since the company had been acquiring concessions, for which object it had been formed, and turning them to account for the purpose of making a profit, it was carrying on a business, although it might be doing so in a passive rather than an active way. The leasing out of the concessions was only a form of turning the concessions to account and the fact that the company was merely receiving payments, computed on the profits arising out of the activities carried on by a third party, did not make its own activities, such as they were, any the less a business. So again, in the case of Inland Revenue Commissioners v. Westleigh Estates Co., Ltd., one of the three cases in (1924) 1 KB 390, the facts were that a limited company was formed for the purpose of more conveniently administering an estate which had become vested in a large number of beneficiaries and it went on performing that function. The company never worked the land or the mines comprised in the estate and its revenue was derived solely from leases of the land and the mines, the leases being renewed as soon as they failed. The Court of Appeal held that the business of the company might be quiescent, but it was still a business and, in fact, the very business for the carrying of which it had been formed. Warring-ton L. J., pointed out that it would be mistaken notion to think that the company was doing nothing except what would have been done by the executors and trustees of a will, administering a trust for the beneficiaries, because, in the first place, it was not a trustee, in the second place, it was acting for its own profit and, thirdly, it was carrying on the operations contained in the Memorandum which were of the nature of business operations. An extreme case was the case of the Inland Revenue Commissioners v. South Behar Rly. Co., Ltd. (1925) AC 476, which was taken up to the House of Lords. The facts there were that a railway company entered into a contract with the Secretary of State for India, under which it was to provide funds, material and equipment for a railway to be constructed by another company and was to receive as remuneration a certain percentage of the gross earnings of the railway. After the railway had been constructed, the company entered into a supplementary contract, under which it practically sold out the railway to the Secretary of State in consideration of a perpetual annuity of a certain sum. The Court of Appeal held that although the activities of the company had been reduced to that of merely receiving payments from the Secretary of State, it was still carrying on business and realising profit in one particular way on the outlay it had made. The House of Lords was even more emphatic. Lord Sumner observed that the fact that the actual construction and the working of the line had been by agreement entrusted by the company to third parties did not at all affect the matter, for this was merely a way in which the company's business was carried on. The important thing in his Lordship's view was that the old business still continued and the Company was still getting some return for the capital invested on the line and as regards the point taken that the company was no longer doing any business inasmuch as it was only receiving an annuity, his Lordship observed in his felicitous way that business was not confined to being busy. The other Law Lords, including Cave L. C. all took the same view.
11. It appears to me on principle and on the authorities to which I have just referred that it is wholly immaterial that the assessee company is not carrying on any mining operations on its own account and never carried on any and that it has arranged for mining operations, to be performed by third parties. The operations it had been actually carrying on, although they did not include mining operations, were plainly sufficient to constitute a business, as it had made a business of prospecting for coal, developing coalfields, obtaining coal mining leases, sub-letting such leases at a profit and of turning the lease and its properties and rights to account in the aforesaid way. Its position is wholly different from the position of an individual proprietor who may own coal fields and grant mining leases deriving thereform only the premium and the royalties. It was taking leases from time to time, subletting such leases from time to time and was thus carrying on a continuous and well planned operation of turning the Karanpura coal fields to account for its benefit by the various organized methods pursued in the sequence I have mentioned. To my mind, it is particularly important to notice that the head-leases which it obtained from the licensor contained among the lessee's covenants a covenant to work and carry on the coal mines and premises in a skilful and workman-like manner according to the most approved practice for the time being adopted in similar mines. This provision was obviously of great importance to the licensor, because he was to get royalty on the tonnage of coal extracted from the mines. The sub-leases granted by the assessee company contained an exactly similar provision in Clause 4 of Part VIII of the sub-leases in the standard form, which is concerned with the lessee's covenants. It seems to me to be perfectly clear that what the assessee company was doing was that it was getting its own duty of working the mines performed by its sub-lessees, making a profit in the process and, therefore, in a sense it was itself carrying on the mining operations by an agent. It is not, however, necessary to limit oneself to this particular aspect of the leases or the activities of the company, because to my mind the totality of the activities, when seen in actual fact and when viewed in the light of the objects of the company, constitute a business and nothing else,
12. As against the authorities which I have mentioned, the assessee company relied upon two decisions of this Court and particularly the decision in the East India Prospecting Syndicate, Calcutta v. The Commissioner, Excess Profits Tax, Calcutta, : 19ITR571(Cal) . In that case also, the assessee had taken out a prospecting licence and entered into an agreement with the licensor for a mining lease and then sublet the lease. The question in that case, however, was not regarding the selami realised from the sublessee, but it was regarding the excess payments received from the sub-lessee over the payments made by the assessee to its own lessor, the licensor. In other words, the dispute there was with respect to the royalties realised on the sub-lease, whereas in the present case it was conceded that the royalties, at any rate, were trading receipts. It is true that the case at first sight seems to support the assessee's contention, but, to my mind, it is distinguishable on the facts. In that case, a single lease appears to have been taken of 500 acres of coal-bearing land and a single sub-lease was granted of the whole and thereafter the assessee company subsided into merely realising the royalties from the sub-lease granted. While it would seem that by the test laid down in the English cases I have just referred to, even such activities would constitute a business, it is enough for me to point out for the purpose of this case that, in the case relied upon, there was no continuous prospecting, repeated taking of mining leases of one area and another and systematic subletting of them as in the present case, constituting a pattern of activities which is plainly a pattern of business. In the course of the judgment in the case of : 19ITR571(Cal) , Harries C. J.. expressed the view that the distinction made in the English cases between companies and individuals would not be a valid distinction under the Indian law and he also observed that under the special Acts with which the English cases dealt, the term 'business' had been defined in quite different terms. Speaking for myself and speaking with great respect, it seems to me that there is virtually no difference between the definition of 'business', as contained in the Acts to which English cases relate and the definition in our Acts. But, in any event, it seems to me that the observations of the English Judges refer more to the general concept of business, as carried on by a limited company, than to the concept of business under any artificial definition, contained in any particular statute. It is of importance in this connection to notice that the principles laid down in the English cases have been approved of by out Supreme Court in no uncertain terms. In the case of Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad, : 25ITR449(SC) , the decision of the Court was unanimous. At' page 404 of the report (SCR): (act p. 368 of AIR), Bhagwati J., who delivered the judgment of the Court, observed as follows:
'The considerations which apply in the case of individuals in the matter of determining whether the activities constitute a business within the meaning of the inclusive definition thereof set out above may not apply in the case of incorporated companies.'
Later on, the learned Judge makes a long extract from the judgment of Lord Sterndale, M.R. in the case of Commissioners of Inland Revenue v. Korean Syndicate Ltd. (1921) 12 Tax Cas 181, which I have already mentioned. I have already referred to the passage he quotes and it is the passage where the learned Master of the Rolls dealt with the difference between a company and an individual and observed that it was material to see in deciding whether a company was carrying on a business or not, what was the particular purpose for which it had come into existence and whether it was pursuing that purpose and turning its properties to account. Bhagwati J., also referred to the observation of Rowlatt J., in the case of Commissioners of Inland Revenue v. Birmingham Theatre Royal Estate Co., Ltd. (1923) 12 Tax Cas 580 where the learned Judge made the following observation:
'when you are considering whether a certain form of enterprise is carrying on business or not, it is material to look and see whether it is a company that is doing it.'
13. In view of the very material difference in the facts and the repudiation by the Supreme Court of some of the basic views expressed, I do not think the East India Prospecting Syndicate case, : 19ITR571(Cal) , can be an authority for holding that the assessee company in the present case was not carrying on business. The same observation apply to the case of Commercial Properties Ltd., In re : AIR1928Cal456 , the other decision relied on.
14. I do not think it necessary for me to engage in any further examination of the facts of the present case or to invoke any other principle beyond those to which I have already referred. In my view, on the facts of the present case, having regard to the Memorandum of Association of the company, the recital of the objects as set out there, to the activity actually carried on and the plain character of those activities continuously pursued with a view to making a profit in a particular way, make it abundantly clear that the assessee company had made a business of exploiting the prospecting licence by (a) prospecting, (b) developing coal-fields, (c) obtaining mining leases with respect to them, (d) subletting them on the same terms as those contained in its own leases and thus turning the licence and the leases to account to its profit. The receipts that came into its hands by way of salami on the sub-leases were in those circumstances clearly business receipts and the profit contained in them was clearly liable to be taxed as business I income. Indeed, when the assesses company admitted that its receipts from the sub-lessees by way of royalties were Business receipts of an income nature and had been properly brought to tax, it admitted that in dealing with the coal fields and the coal-mining leases by way of sub-letting them, it had been carrying on a business and had not been holding and exploiting them as a mere proprietor. If so, and if its transactions with the sub-lessees which yielded the royalties was a business, it is impossible to see how the salami amounts, arising out of the same transactions, could be anything but business receipts earned by using the coal-fields and their head leases as stock-in-trade.
15. For the reasons given above, the answer to the question referred must, in my opinion, be in the affirmative.
16. The Commissioner of Income-tax will have his costs of this Reference.
17. I agree.