Civil Appeal Nos 1 of 1974 and 1355 1356 of 1973
273 From the Judgment and Order dated 222441970 of the Bombay High Court in ITR No 111 of 1963 BB Ahuja and Miss ASubhashni for the Appellant
F N Kaka SN Talwar Y Chaudhary and HS Parihar for the Respondent
The Judgment of the Court was delivered by SABYASACHI MUKHARJI J
These appeals are from the judgment and order of the High Court of Bombay dated 22nd24th April 1970
These are by certificate granted by the High Court under section 66Aii of the Indian Income tax Act 1922
The judgment under appeal is reported in 81 ITR at page 777
The familiar yet not always easy to answer question whether a particular receipt is capital or revenue looms large in these appeals arising out of the assessment to income tax for the assessment years 1950 51 1951 52 and 1953 54 the accounting years respectively ending on 31st May 195031st May 1951 and 31st May 1953
The assessee is a public limited company limited by shares
It derived income from several sources including certain business operations
These operations were carried out in India and abroad and used to be carried out inter alia in Burma and Siam
The assessee company carried on business in Burma from 1862 onwards
In connection with its business of selling timber the assessee company had to enter into contracts which are mentioned as forest leases  with the Government of Burma
In the year of account ending on 31st May 1950 the assesseecompany was the owner of about 15 forest leases
The agreed position between the parties was that all the forest leases contained provisions and clauses exactly similar to the speciman copy dated 28th October 1925 which was taken into consideration by the High Court
It may be mentioned however that the forest leases were for the duration of 15 years and in respect of large areas
Under these leases the assesseecompany was authorised to fell the teak trees and convert them into the logs and upon completion of the extraction thereof to remove the logs after payment of royalty to the Government of Burma for its own purposes
Clause 27 in these leases authorised the assessee company even after the expiry of the period of 15 years of the lease to remove the logs in respect whereof extraction had been completed upon pay 274 ment of royalty
The period for such removal under clause 27 was fixed at three years after the expiry of the lease period mentioned in clause 4
These leases contained renewal clauses
The forest leases of the assessee company did not commence on the same date and related to different parts of the forests in Burma
These leases were made as mentioned hereinbefore in 1862 first and had been continuously renewed from time to time
It was stated that five similar business organisations obtained forest leases from the Government of Burma for their business in timber
Before the period of 15 years mentioned in these leases expired the Second World War started and the Japanese army overran Burma
The then Government of Burma then extended the periods of current leases until such time as it became possible to resume forest operations and for such further periods as might be required for settlement of the new forest leases to be executed between these business organisations and the Government
Upon termination of the hostilities in connection with the resumption of the forest operations the Government made provisional arrangements in terms of what is referred to in paragraph 7 of the statement of the case as weight agreement
The Union of Burma came into existence from 4th January 1948
Under section 442 of the Constitution of Burma there was a directive for nationalisation inter alia of the forest exploitations
Thereafter correspondence took place inter alia between five European companies who were exploiting forests in Burma under the various leases and the Government in connection with the taking over of the exploitation by the Government of Burma
The High Court noted the relevant correspondence dealing with such arguments
On 1st June 1948 a third of the total teak area mentioned in the 15 forest leases of the ownership of the assessee company was taken over by the Government of Burma
Forest exploitation in respect of the rest of the 23rds area was also taken over by the Government on or about 10th June 1949
In that connection certain correspondence had been addressed by the assessee company to the Government
The Union of Burma on the one hand and the assessee company and Steel Brothers  Company Ltd on the other executed an agreement dated 10th June 1949 on the footing that the forest leases had already been terminated
The agreement provided for making over by the assesseecompany to the President of the Government of Burma of the assessee company s residuary rights  under the forest leases together with the non duty paid logs wherever found and also for making over 275 of all the assets pertaining to the forest leases viz headquarters elephants cattle stores buildings dewelling houses motor transport tractors launches etc
and for certain other incidental matters
The agreement provided for handing over by the President of the Government of Burma the assessee company of 50000 tons of teak logs of the specified qualities mentioned in clause 7 of the said agreement
There was no dispute between the parties that in pursuance of the agreement the assessee company had made over to the Government of Burma the assets mentioned in clause 1 of the agreement
There was also no dispute that in pursuance of the agreement the Government of Burma handed over in all 43860 tons of logs to the assessee company
There was no dispute that those 43860 tons of logs were delivered against three kinds of assets in the following quantities 1 28847 tons against non duty paid logs handed over by the asseessee company to the Government
2 2946 tons against depreciable assets like land and buildings launches furniture and stores
3 12067 tons against livestock like elephants etc
The account of these 43860 tons of logs delivered by the Government was maintained by the assessee company in what is described in the Income tax Officer s report as Burma forests assets realisation reserve account
These 43860 tons of logs were sold off by the assessee company from time to time in the accounting years 1949 1950 1951 and 1952
The aggregate sale proceeds during the above four years came to Rs13555611 as appears from the assessment order which is annexed to the statement of the case
In connection with these sale proceeds the Income tax Officer stated that as the receipts and sales of logs had taken place over a period of four years the amount realised had to be allocated amongst the various years
He further stated that the basis of the allocations was agreed to by the assessee
He proceeded to make the allocation on the footing that the assessee had incurred costs for getting delivery of these logs at the rate of Rs225 per ton on 10th June 1949
He then considered the proceeds realised and made the allocations for the assessment years 1950 51 and 1951 52 in the manner appearing in paragraph 9 of the statement of the case submitted to the High Court
Upon allocation made in the above manner the Income tax Officer s finding was that in the year ending 31st May 1950 the assessee had received 18676 tons of logs
The sale 276 proceeds of Rs6552153 were received in respect of non duty paid logs delivered to the assessee company
The sale proceeds of Rs31980 were received in respect of logs received against depreciable assets stores and livestock
For the accounting year ending 31st May 1951 the Income tax Officer held that the assessee had received in all 16299 tons of logs
The sale proceeds of those logs were allocated as follows Rs578896 in respect of non duty paid logs handed over by the assessee company to the Government Rs269975 in respect of the logs delivered against handing over of depreciable assets stores and livestock 81 ITR p 785 The question that arose upon such allocations having been made in the manner indicated was as to whether the receipt of Rs6552153 in the accounting year ending 31st May 1950 and Rs578896 in the accounting year ending 31st May 1951 was exempt from tax as being a receipt of capital nature as contended by the assessee company
Similarly the further question which arose was as to whether sale proceeds amounting to Rs31980 in the accounting year ending 31st May 1950 and Rs269975 in the accounting year ending 31st May 1951 in respect of depreciable assets were liable to tax under the Act or were altogether free from such liability
The Income tax Officer as well as the Appellate Assistant Commissioner made findings against the assessee companies in connection with these amounts
On behalf of the assessee company it was urged before the Appellate Tribunal that the entire receipt and delivery of the 43860 tons of logs were on capital account
The submission was that the assessee s business of dealing in timber in Burma had got sterilized and the above quantity of logs was received only in respect of the said sterilization or loss of the capital asset
In connection with that submission the Appellate Tribunal held against the assessee company that the assessee s business had not stopped and there was no question of sterilization of its business
The forest leases owned by the assessee company had expired and were not bound to be renewed and the residuary rights available to the assessee company under clause 27 of the forest leases were merely rights to remove the extracted logs within a period of three years from the forest areas
The assessee company had no interest in land of the forest areas
The Tribunal however observed that though the agreement referred to certain residuary rights under clause 27 of the agreement 277 there was nothing to show that any compensation was paid in respect of any rights available to the assessee under clause 27 of the lease agreement
The contention that the realisations were in respect of capital assets was rejected
It was further held that the realisation in respect of logs received against depreciable assets stores and livestock were profits and liable to tax
In calculating the profits it was held that the logs received by the assessee company were received by it at the cost value of Rs225 per ton
After having recorded the findings in the aforesaid manner the Tribunal referred to the High Court concerned ie the High Court of Bombay certain questions of law for the assessment year 1950 51 and 1951 52
The High Court felt that question No 1 in both these assessment years need not be answered and this position was agreed to by the parties
The following questions for these two assessment years were really considered by the High Court I Assessment year 1950 51   2
Whether on the facts and in the circumstances of the case the amount of Rs6552153 or any part thereof was exempt from tax as being a receipt of a capital nature 3
Whether on the facts and in the circumstances of the case the amount of Rs141156 was liable to tax under the second proviso to section 102vii of the Income tax Act and whether there was any evidence that the conditions of the application of that proviso were all satisfied 4
Whether on the facts and in the circumstances of the case the amounts of Rs5250 Rs1025 and Rs25705 being the excess realisations over Rs225 per ton for logs received in respect of depreciable assets stores and livestock respectively were liable to tax under the Act II
Assessment year 1951 52 1       278 2
Whether on the facts and in the circumstances of the case the amount of Rs518896 or any part thereof was exempt from tax as being a receipt of a capital nature 3
Whether on the facts and in the circumstances of the case the amounts of Rs44407 Rs8639 and Rs216929 being the excess realisations over Rs225 per ton for logs received in respect of depreciable assets stores and livestock respectively were liable to tax under the Act Similarly for the assessment year 1953 54 the questions referred by the Tribunal to the High Court were as follows 1
Whether on the facts and in the circumstances of the case the amount of Rs558188 or any part thereof was exempt from tax as being a receipt of a capital nature 2
Whether on the facts and in the circumstances of the case the amount of Rs9493 being the amount of compensation received for stores acquired by the Burmese Government was liable to tax under the Act The High Court answered all these questions in favour of the assessee
The High Court answered for the assessment year 1950 51 the question 2 in the affirmative for the entire amount questions 3  4 in the negative for the assessment year 1951 52 the second question in the affirmative and question No 3 in the negative
For the assessment year 1953 54 both the questions were answered in the affirmative
The revenue has come up in appeals
In order to appreciate the controversy broad features of the facts some of which have been noted before have to be borne in mind
The business in question of the assessee started in Burma in 1861
There were 15 agreements with the Government of Burma for exploitation of forests at the relevant time
The agreements were entered into at different times and provided for expiry of leases on different dates
At page 27 of the Paper Book a typical agreement dated 28th October 1925 is indicated
Similar agreements were entered into for other leases
The terms provided inter alia as follows General rights 1
The Contractor shall within the series of of contractor coupes into which the forest area described in Schedule I and hereinafter 279 referred to as the Concession Area shall be subdivided as provided in clause 5 and during the periods for extraction there from prescribed in clause 6 and subject to such further conditions limitations and restrictions as are hereinafter prescribed have the sole right and license to a fell the teak trees gridled or marked in that behalf by the officers of the Forest Department in accordance with the directions contained in clause 8 and any naturally dead standing teak trees b convert into logs all such trees all naturally felled teak trees and all felled teak timber left unloged from former operations and c remove all such logs and all logs were left unextracted from former operations PROVIDED that is any area to which a scheme for concentrated exploitation accordance with any sanctioned working Plan has been applied the Contractor shall have no rights in standing teak trees under five feet six inches in girth measured at breast height from the ground
Grant of other 2
The Government acting on behalf of the rights in Con Secretary of State reserves to itself the cession Area
right to enter into agreements with other parties for the extraction of timber other than that which the Contractor is entitled to extract under this Agreement from the whole or from any part of the Concession Area
 The proviso to that clause need not be set out
Clause 41 was as follows Period during 4
1 This Agreement shall come into force which Agreementon the 1st day of January 1926 and shall is in force unless previously terminated under clause 26 or clause 29 terminated after the expiry of a period of fifteen years viz on the 31st day of December 1940 PROVIDED that in respect of the rights conferred by 280 clause 27 or by sub clause 2 of this clause and in respect of very liability incurred under this Agreement it shall continue in force for such further period as is necessary for the enjoyment of such rights and the enforcement of such liabilities
 Clause 15 of the agreement authorises the assessee company to cut canals make water courses build bridges and other railway works etc
on certain conditions
Clause 16 dealt with control of such private railways
Clause 18 dealt with the inspection etc
Other relevant clauses were General respo 19
Nothing herein contained shall be deemed nsibilities to relieve the Contractor his agents and of Contractor
servants of the duty of complying with any Act of the legislature and of the rules thereunder at the time being in force and applying to the Concession Area
With thirty days from the dates respectively on which measurement statements of timber have been furnished to the Contractor by the Forest Department the Contractor shall pay or to be paid into such Government Treasury as the Government may appoint royalty in respect thereof according to the following rate namely                
Clause 21 read as follows Marking of 21
The Contractor shall be entitled to have timber after the timber which has been measured for Measurement royalty marked at the time of measurement with a Government hammer mark denoting that the timber has been so measured and after payment of such royalty the timber thus marked shall become the property of the Contractor
 Clause 23 was as follows 23
Until teak timber has been marked and royalties have 281 Teak timber been paid thereon in accordance with the Goverment pro preceding clause it shall be deemed to be perty up to property of the Government and the the payment Contractor shall have no right to sell of royalty
mortgage or hypothecate it or create any charge or lien thereon
 Clause 27 of the agreement provides as follows 27
On the conclusion of the period specified in clause 4 or on the termination of this agreement under clause 26 or clause 29 as the case may be a the contractor shall be allowed a further period of three years for delivering at a measuring station and removing therefrom after payment of royalty on or otherwise dealing as provided in clause 20 with any timber bearing his authorised hammer marks the extraction of which has in accordance with the terms of this agreement been completed before the date such conclusion or termination and on the expiry of such further period he shall cease to have any rights whatever in timber not yet so delivered Provided that the rates of royalty payable under this clause shall be the same as the rates fixed for the concession area under any new agreement whether with the present contractor or with other parties subsequent to this agreement or in the event of no new agreement being entered into at the rates of royalty set out in clause 20 of this agreement b the contractor shall be given such reasonable time as in the opinion of the Government may be necessary to allow him to dispose of such of his buildings mills railways or other structures erected for the purposes of his business under this agreement as are standing on land at the disposal of the Government Under clause 29 the Contractor was given the rights to terminate the agreement at any time by giving two years notice in writing
On the 1st January 1926 there was commencement of the agreement
31st December 1940 was the due date of expiry of the agreement
On 7th April 1942 there was extension by the Government of Burma of the long term agreement till such time as it became possible H 282 to resume forest operations and for such further period as might be required for settlement of new agreements
On 24th January 1948 there was a letter by the Government of Burma to the assessee and others in connection with ending of joint working arrangements between consortium of 5 contractors on the one hand and Government of Burma on the other hand for exploitation of forests
On 4th February 1948 there was the assessee s letter to the Government of Burma indicating their specific rights under the Forest Agreement in respect of logs in the course of extraction on termination of agreements
on 10th February 1948 the Burmese Government replied to the assessee s letter dated 4th February 1948 informing that the normal period of currency of agreement had already expired and the life of the agreement had been prolonged under letter dated 7th April 1942 and also under the Weight Agreement which expired on 1st May 1947
Government s decision to terminate long term pending lease negotiations and to terminate on 31st May 1948 joint operations in the area intended to be taken over by Government and the Government s intention to consider any claims of residuary rights under the expiring agreements was also indicated to the assessee
On 10th June 1949 there was an agreement between the President of Union of Burma and the assessee and Steel Bros inter alia dealing with the residuary rights under clause 27 of the 1925 agreement and the settlement to be made in respect thereof
The agreement inter alia reiterated that whereas under lease under clause 27 there were certain residuary rights as we have noted hereinbefore whereas certain questions had arisen in the settlement being made by the Government as regards the said rights as well as the assets of the lessees in the forest areas which the lessees desired to surrender to the Government the parties had agreed to resolve this question indicated under clause 1 therein
It is not necessary to set out the details here
These have been set out at pages 80 81 of the Paper Book
We have set out the relevant portions of the material documents relied before the High Court
It may be mentioned that the High Court in its judgment has set out the discussion at page 793 of the report between the Government of Burma and the assessee company
The said discussion recorded is as follows 283 The Government of Burma was always the grantor
Apparently this was so because the forests were always of the ownership of the Government
The Government was the single owner of all the forests
These forests were never intended to be transferred to any grantee at any time
The forest leases were always of duration of 15 years or more
They always related to extremely large areas which were sub divided into large coupes
These coupes were also not to be worked at the same time but according to schedule fixed in respect thereof
Each specified group of coupes was to be worked within three years
The extraction of the trees was to be completed within the fixed period of three years
The schedule fixed was compulsorily to be adhered to
The work of extraction was to be done in accordance with the rules prescribed for felling logging and removal
The Government was accordingly not a seller of any stock in trade and the assessee was not a purchaser of any stock in trade
The assessee undertook the obligations of various kinds so as to complete the work of extraction as indicated in the contract
The assessee had to maintain extremely large establishments and headquarters at various places and had in that connection put up various permises including dwelling houses and buildings
It had to maintain diverse sorts of mechanical appliances and had inter alia owned motor transport tractors launches elephants cattle and diverse assets for the purposes of working these forest leases
The Government was not concerned in any part of the operations relating to the extractions done by the assessee from the contract area
It is of importance that the right of extraction andor to fell convert and remove that was given to the assessee was to be exercised in respect of the growing forest trees andor uncut timber
There was a further right to log all felled teak timber left unlogged from former operations
The consideration that was charged by the Government was only the royalty agreed to be paid to the Government
G The main question is whether the acquisition of forest leases by the assessee was capital asset or stock in trade
The next question which arises for the first two years is whether there is any scope of application of section 102vii of Indian Income tax Act 1922 in respect of the amount of RS 141156 for the assessment year 1950 51 284 and for 1951 52 whether the amounts of RS 44407 RS 8639 and RS 216929
being the excess realisations over RS 225 per ton for logs received in respect of depreciable assets stores and livestock were liable to tax under the Act
The two questions relevant for the assessment year 1953 54 will be dealt with separately
The main submission by Shri BB Ahuja on behalf of the re venue was that the assessee was operating on a wide field in more than one country for obtaining its stock in trade in timber
The fresh con tracts entered into by the assessee 15 at the material time which commenced and expired at different times were contracts entered in the course of its business
It was therefore submitted that these were trading contracts
The assessee s right under the contract of 1925 according to Shri Ahuja was to i fell teak trees
The assessee was trading in teak ii convert them into logs and iii remove them on payment of royalty
Under clause 27 of the Agreement the assessee had no interest in land as such it had only a right to collect and take away logs its stock in trade it could not fell any fresh trees
The agreement dated 10th June 1949 was entered into by the assessee according to the learned counsel for the revenue in the course of its business
He further submitted that 28847 logs received by the assessee under the agreement dated 10th June 1949 were in substitution of the logs that it had already cut and had not been able to remove from the forests
It was urged it was merely a recompense for its rights in the stock in trade
It has to be borne in mind that though the assessee had several sources of income including income from business operation the assessee s company s main income was from felling the trees and carried on the said business on an extensive scale
On behalf of the assessee it was submitted that forest leases constituted the income producing assets of the company
Mr Kaka submitted that these involved the setting up of the entire business and investment of large funds in building dams canals roads railways buildings etc
He drew our attention to clause 15 of the lease agreement which has been set out at page 40 of the Paper Book in Statement of case
Mr Kaka further reiterated that the leases were for a long duration with a first right to refusal to any subsequent leases
Reference was made in this connection to clause 42 of the lease agreement appearing at page 30 of the Paper Book
The Forest leases
it was 285 urged by him were not ordinary commercial contracts made in the A course of carrying on their trade or for the disposal of their products
These leases related to the whole structure of the assessee s profit making apparatus
It was further submitted that these regulated the assessee s activities defined what they might or might not do and affected the whole conduct of the assessee s business
According to him the forest leases therefore constituted the capital assets of the assessee s business
He relied on a decision in Van Den Berghs Ltd vs Clark at 25 and also Hood Bars vs Commissioner of Inland Revenue No 2 87 Tax Cases 188
Shri Kaka therefore submitted that the rights acquired under the contract were three folds viz 1 to fell trees 2 to convert the felled trees into logs and 3 to remove the logs
He referred us to clause 1 of the lease Agreement which appears at page 27 of the Paper Book
Detailed provisions were made in clauses 9 10 and 11 regarding each of these operations
It was further submitted that during the initial period of 15 years the assessee had the right to carry on all the three operations while under the residual rights the assessee could only carry on the operations of logging and removal of logs already felled by him
Under clause 27 the assessee had no rights in the felled logs but only had the right to log and remove them and acquire the same after payment of royalty
It was his submissions that in the absence of clause 27 the assessee would have no right to the felled trees which would have remained the property of the Government of Burma
We are of the opinion that he is right
It was further submitted that the assessee had not rights to felled trees which were not logged and removed within 3 years according to the terms of clause 27 of the lease agreement
The consideration for the 43860 tons of logs agreed to be handed over to the assessee was the surrender to the residuary rights under the Forest leases and the acquisition of the assets pertaining to the Forest Leases
He referred to us in this connection to clause 1 of the Take over Agreement which has been set out at page 80 of the Paper Book
Mr Kaka further submitted that one lump sum consideration was paid for both the surrender of the residuary rights and acquisition of assets of the business under clause 7 of the Take over Agreement at H 286 p 82
The splitting up of the consideration according to him in clause 10 was merely for the implementation of the agreement as Schedule provided in the manner of handing over the logs to the assessee in exchange of certain assets
If the residuary rights and assets had not been acquired by the Government the assessee would have carried on his business for another 3 years and logged and removed the felled trees
The assessee was prevented from carrying on this business upon the nationalisation of the forest resources and the consequential acquisition of the residuary rights and assets pertaining to the forest leases belonging to the assessee
Mr Kaka urged that compensation therefore paid for acquisition of the residuary rights and assets was for the sterilization of the Company s business and therefore a capital receipt
He relied on the observations of Lord Buckmaster at page 463 and Lord Wrenbury at page 465 in Glenburg Union Fireclay Co Ltd vs The Commissioner of Inland Revenue 12 Tax Cases 427
It was further urged that once it was held that the forest leases constituted the capital assets of the assessee compensation paid for the sterilization of even part of a capital asset must be regarded as a capital receipt
Furthermore according to him it made no difference whether there was a sale of an asset out and out or it was a means of preventing the acquisition of profits that would otherwise be gained
He urged that in either case the asset of the company was sterilized or destroyed
Reliance was placed on the observations of this Court in Commissioner of Income Tax vs Vazir Sultan  Sons at 191 and Godrej  Co vs Commissioner of Income Tax It is therefore necessary as mentioned hereinbefore to examine whether the acquisition of forest leases by assessee were acquisitions of capital assets
Though we will refer to some of the decisions to which our attention was drawn and which were referred to by the High Court it is well to bear in mind the basic principles
These are if there was any capital asset and if there was any payment made for the acquisition of that capital asset such payment would amount to a capital payment in the hand of the payee
Secondly if any payment was made for sterilization of the very source of profit making apparatus of the assessee or a capital asset then that would also amount to a capital receipt in the hand of the recipient
On the other hand if forest leases were merely stock in trade and payments were made for taking over the stock in trade then no question of capital receipt comes
The sum would represent payments of revenue nature or trading receipts
Whether in a particular case for the contracts of the type with which we are concerned payments were capital receipts or not would depend upon the facts and circumstances of the case
In this 287 connection it is important to bear in mind that normally in trade there A are two types of capital one circulating capital and the other fixed capital
Fixed capital is what the owner turns to profit by keeping it in his own possession circulating capital is what he makes profit of by parting with it and letting it change hands
Therefore circulating capital is capital which is turned over and in the process being turned over yields profits or loss
It is well settled as the High Court observed in the judgment under appeal that what is capital assets in the hands of one person may be trading assets in the hands of the other
The determining factor is the nature of the trade in which the asset was employed
Compensation received for immobilisation sterilization destruction or loss total or partial of a capital asset would be capital receipt
If a sum represented profit in a new form then that was income but where the agreement related to the structure of assessee s profit making apparatus and affect the conduct of the business the sums received for cancellation or variation of such agreement would be capital receipt
In Senairam Doongarmall vs Commissioner of Income lax Assam at 406 this Court observed as follows after discussing several authorities All these cases were decided again on their special facts
Though they involved examination of other decisions in search for the true principles it cannot be said that they resulted in the discovery of any principle of universal application
To summarise them South India Pictures  case was so decided because the money received was held to be in lieu of commission which would have been earned by the business which was still going and the receipt was treated as the fruit of the business
The same reason was given in Jairam Valiji s case  and the Shamsher Printing Press case In Vazir Sultan s case 36 ITR 175 the compensation was held to replace loss of capital and in Godrej s case  the compensation was said not to have any relation to the likely income or profits but to loss of capital
Each case was thus decided on its facts
We have so far shown the true ratio of each case cited before us and have tried to demonstrate that these cases do no more than stimulate the mind but none can serve as a H 288 precedent without advertence to its facts
The nature of the business or the nature of the outlay or the nature of the receipt in each case was the decisive factor or there was a combination of these factors
Each is thus an authority in the setting of its own facts
 All these cases have been discussed in the judgment under ap peal at page 795 of 81 ITR As Hidayatullah J as the Chief Justice then was observed in 42 ITR at page 392 each case depended upon the facts of each case
This Court had occasion to consider some of these aspects in Commissioner of Income tax UP vs Gangadhar Baijnath whereas at page 25 of report referring to several authorities it noted The question whether a receipt in capital or income has frequently come up for determination before the courts
Various rules have been enunciated as furnishing a key to the solution of the question but as often observed by the highest authorities it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question which must ultimately depend on the facts of the particular case and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision vide Van Den Berghs Ltd vs Clark  3 ITR Eng Case 17 HL
That however is not to say that the question is one of fact for as observed in Davies HM Inspector of Taxes vs Shell Company of China Ltd  22 ITR suppl 1 CA these questions between capital and income trading profit or no trading profit are questions which though they may depend no doubt to a very great extent on the particular facts of each case do involve a conclusion of law to be drawn from those facts 
 Similar observations were made in Commissioner of Income tax Poona vs Manna Ramji and Co The Court reiterated the same principle
We have referred to the discussion which took place with the 289 Government of Burma on 28th October 1925
Having regard to all A these the forest leases in our opinion affected the very structure of the operation of the assessee
In this connection we may remind ourselves of the decision of the House of Lords in Van Den Berghs Ltd vs Clark HM Inspector of Taxes case
In that case a Dutch company and the assessee who were competitors in the manufacture and dealing in margarine in order to end the competition entered into an agreement in 1908 by which they bound themselves to work in friendly alliance and to share their profits and losses in accordance with an elaborate scheme therein specified further it was stated that they would promote the commercial pecuniary buying and selling and other interests of the two companies
In 1913 another agreement was entered into modifying the original basis of ascertaining and sharing profits and subject thereto continued in force the provisions of the agreement of 1908 until December 1940
During the war the agreements were not operated but in 1920 a third agreement was made modifying the two previous agreements as to the basis of profit sharing extending the branches of the business and again continuing the principal agreement of 1908 till December 1940
In 1927 three agreements were made under which the appellants agreed to determine the agreements of 1908 1913 and 1920 in consideration of the payments to them of  450000
The Special Commissioners held that that sum was paid in respect of the pooling agreements and must be brought in for the purposes of arriving at the balance of the profits of the appellants for the year ending December 1927 and consequently that the sum was an income receipt
Finlay J held that the cancelled agreements were capital asset of the appellants and that the sum of 450000 was not an income receipt at all
The Court of Appeal restored the decision of the Commissioners who had held that the sum was not received by the appellants in consideration of the surrender of a fixed capital asset but arose from a transaction attributable to circulating capital and therefore an income receipt
By the House of Lords it was held that  450000 was not an item of profit arising to the appellants from the carrying on of their trade as the agreements which were cancelled were not ordinary commercial contracts made in the course of trading nor merely agreements as to how trading profits should be distributed but affected the whole conduct of their business
It was held that money laid out in the cancellation of so fundamental an organisation of a trader s activities could not be regarded as an income receipt of disbursement
The agreements formed the fixed framework within which their circulating capital operated and were not incidental to the working of their profit making machine
The Court reiterated H 290 the observations and principles laid down by Lord Cave in British Insulated  Helsby Cables Ltd vs Atherton The observations of Lord Macmillan at page 25 of 3 ITR English case are apposite to the facts before us
The three agreements which the appellants in that case had consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business
These regulated the appellant s activities defined what the appellants might and what might not do and affected the whole conduct of the appellant s business
Accordingly Lord Macmillan found it in that case difficult in seeing how money laid out to secure I or money received for the cancellation of so fundamental an organisation of a trader s activities could be regarded as an income disbursement or an income receipt
Lord Macmillan noted that the legal character of the payment should not be mis judged by the magnitude of payment for the magnitude is a relative term
But the magnitude of a transaction is not an entirely irrelevant consideration
With respect we accept this approach of Lord Macmillan to the facts of the present case before us which appears to be basically similar
The forest lease therefore constituted in our opinion capital assets of the assessee
The same conclusion is fortified by the observations of House of Lords in the case of Hood Barrs vs Commissioner of Inland Revenue No 2 37 Tax Cases l 88
In Commissioner of Income tax Hyderabad Deccan vs Vazir Sultan  Sons  this Court held that in considering whether compensation paid to an agent on the cancellation of his agency was a capital receipt or a revenue receipt the first question considered was whether the agency agreement in question was a capital asset of the assessee s business and constituted its profit making apparatus and was in the nature of its fixed capital or it was a trading asset or circulating capital or stock in trade of its business
If it was the former compensation received would be a capital receipt if the agency was entered into by the assessee in the ordinary course of his business and for the purpose of carrying on that business it would fall into the latter category and the compensation received would be a revenue receipt
Having regard to the nature of the forest leases which we have discussed before in our opinion the payments made for cancellation 291 Or sterilisation of the rights under these leases would be capital receipts
See in this connection the observations of Lord Buckmaster in the decision of House of Lords in The Glenboig Union Fireclay Co Ltd vs The Commissioner of Inland Revenue supra
The observations of Lord Wrenbury are at page 465
We have discussed the facts regarding the cancellation and circumstances under which it was entered and we may refer to the facts stated in the judgment of the High Court at pages 798 799
As a result of the above findings the High Court came to the conclusion that sum of Rs6552153 mentioned in question No 2 for the assessment year 1950 51 and the sum of Rs518896 mentioned in question No 2 for the assessment year 1951 52 were related to the 28 847 tons of logs which are exempt from tax as being receipt of a capital nature on the background of the facts found by the High Court
Question No 3 really does not arise because for levy of a balancing charge under section 102vii of Income tax Act 1922 it is absolutely necessary that the depreciable assets should have been sold at a price agreed to between the parties
See in this connection also the observations of this Court in Commissioner of Income tax vs Motors  General Stores P Ltd But in exchange there is a reciprocal transfer of interest in movable property a corresponding transfer of interest in another movable property which is often denoted as barter 
The agreement of 10th June 1949 had resulted from the enforcement of the Government s policy of nationalisation of forest operation and the agreement does not involve any transaction of sale between the assessee and the Union of Burma
The assessee company never paid any money by a price in respect of assets delivered to it by the Government therefore this amount of Rs141156 could not be brought to tax against the assessee company under the second proviso to section 102vii of the Indian Income tax Act 1922
The question accordingly was rightly decided in favour of the assessee
Regarding question No 4 in the assessment year 1950 51 and the question No 3 in the assessment year 195l 52 these related to the delivery of 2946 and 12067 tons of logs to the assessee company in respect of the depreciable assets stores and livestock mentioned in sub clause b of clause 1 of the agreement dated 10th June 1949
The High Court was right in holding that logs came into possession of the assessee company in consequence of the agreement made on 10th June 1949 against delivery of all outstanding or residuary rights of the assets to the Government
The arrangement was in consequence of 292 nationalisation of forest operations in Burma
The whole of the quantity of 43860 tons of logs delivered to the assessee company was in lieu of the asset of the forest leases and the other diverse assets which were handed over by the assessee company to the Government on 10th June 1949
These logs were not received by the assessee company on revenue account at all
The fact that the assessee company did not mix up these logs with any of the stock in trade held by it in its ordinary course of business is an indication of the fact that the assessee did receive these as stock in trade
These logs were received by the assessee company for four years and held by it in the account which is described as Burma forest assets realisation reserve account 
The sale proceeds of these logs could not be held to have been received by the assessee company on revenue account
The High Court was right
T he question No 4 in the first year and the question No 3 in the second year must be answered in the negative and against the revenue
We have set out hereinbefore the questions relating to assessment year 1953 54
It appears from the facts that nothing was paid by the Government to the assessee company in connection with 13 area of the forest areas which the Government had taken over from the assessee company on 1st June 1948
The assessee company had filed a suit against the Government in connection with the timber logs and stores taken over by the Government on 1st June 1948
The facts in connection with the delivery of these goods appeared in the letter of the Government to the assessee company dated 24th January 1948
In the suit filed by it the asessee company succeeded in obtaining a decree for Rs558 188
The Tribunal held that the timber taken over by the Government in respect of 13rd area was stock in trade and the proceeds were taxable
Mr Kaka was right in his submission that the timber taken over was towards the residuary rights in respect of the assets lying within 13rd area taken over on 1st June 1948
The price of the timber as such was never paid by the Government
In the decree this sum was awarded in lieu of the rights which the assessee company had under clause 27 in respect of 13rd area taken over by the Government
To these facts the terms of the agreement dated 10th June 1949 would be applicable
This sum cannot therefore be taxed
On the question No 2 for the assessment year 1953 54 no argument was advanced before the High Court on behalf of the assessee and the High Court answered the question in the affirmative
293 In view of the principles involved and the nature of the transactions we are of the opinion that the High Court was right in answering the question in the manner it did
In the premises these appeals fail and are dismissed with costs
PSS Appeals dismissed


Summary:
The assessee Company carrying on business of selling timber in India and abroad entered into contracts in the nature of forest leases with the Government of Burma under which it was authorised to fell teak trees convert them into logs and remove them after payment of royalty
These leases which were made first in the year 1862 had been continuously renewed from time to time
Clause 27 of the agreement authorised the assessee company even after the expiry of the lease period of 15 years to remove the logs in respect whereof extraction had been completed upon payment of royalty during the next three years
At the relevant time the assessee company was the owner of fifteen such forest leases
The last of these leases commenced on Ist January 1926 and 31st December 1940 was the due date of expiry
However before the expiry of the period the Second World War started and the Government of Burma extended them until such time as it became possible to resume forest operations
After formation of the Union of Burma the ownership of the forest leases of the assessee company was taken over by the Government of Burma in 1948 49 a third of the total teak area on June 1 1948 and the rest on or about June 10 1949
In terms of an agreement dated 10th June 1949 between the parties the assessee made over to the Burmese Government its residuary rights under the forest leases together with the non duty paid logs wherever found and also all the assets viz buildings dwelling houses etc
pertaining to the forest leases and received 28847 tons of teak logs in substitution of non duty paid logs 2946 tons against depreciable assets and stores and 12067 tons against livestock
The logs so received by the assessee com 270 pany were sold off by it from time to time in the accounting years 1949 1950 1951 and 1952
The Income tax Officer sought to bring these sale proceeds to tax by allocating them amongst the various assessment years
The questions that arose were i whether the realisation in respect of substituted logs was exempt from tax as being a receipt of capital nature and ii whether the sale proceeds in respect of logs received in lieu of depreciable assets stores and livestock were liable to tax under the Act or were altogether free from liability
The Income tax Officer the Appellate Assistant Commissioner and the Tribunal held against the assessee
The High Court however answered the questions in favour of the assessee
In these appeals by certificate under section 66A2 of the Income tax Act 1922 it was contended for the Revenue that the contracts entered into by the assessee company for obtaining its stock in trade in timber were trading contracts that under cl 27 of the agreements the assessee had no interest in land as such it had only a right to collect and take away logs its stock in trade and it could not fell any fresh trees that 28847 tons of logs received by the assessee under the agreement were in substitution of the logs that it had already cut and had not been able to remove from the forests merely as a recompense for its rights in the stock in trade and that the excess realisation in respect of logs received against depreciable assets stores and livestock were profits and liable to tax under section 102vii of the Income tax Act 1922
For the assessee respondent it was contended that the forest leases constituted the income producing capital assets of the company in which it had invested large funds in building dams canals roads railways buildings etc that the forest leases were not ordinary commercial contracts made in the course of carrying on their trade or for the disposal of their products these related to the whole structure of the assessee s profit making apparatus that the consideration for the logs received was the surrender of the residuary rights under the forest leases and acquisition of assets of the business under the take over agreement that the assessee was prevented from carrying on business upon the nationalisation of forest resources and acquisition of residuary rights and assets pertaining to the forest leases
It was further submitted that the compensation paid to the assessee was the sterilisation of the company s business and thus a capital receipt not subject to tax
Dismissing the appeals the Court 271  HELD 11
The forest leases constituted capital assets of the assessee
The payments made for cancellation or sterilization of the rights under these leases were therefore capital receipts and not liable to tax
290E 12
Whether in a particular case payments were capital receipts or not depends upon the facts and circumstances of the case
The basic principles are if there was any capital asset and if there was any payment made for acuisition of that capital asset such payment would amount to a capital payment in the hands of the payee
Secondly if any payment was made for sterilization of the very source of profit making apparatus of the assessee or a capital asset then that would also amount to a capital receipt in the hands of the recipient
If on the other hand the leases were merely stock in trade and payments were made for taking over the stock in trade then no question of capital receipt comes
The sum would represent payments of revenue nature or trading receipts
Compensation received for immobilisation sterilization destruction or loss total or partial of a capital asset would therefore be capital receipt
If a sum represented profit in a new form then that would be income but where the agreement related to the structure of assessee s profit making apparatus and affected the conduct of business the sums received for cancellation or variation of such agreement would be capital receipt
286H 287A D In the instant case the forest leases affected the very structure of the operation of the assessee
The compensation received for the cancellation of assessee Company s activities could not be regarded as an income receipt nor the legal character of the payment misjudged by the magnitude of the payment
289A 290C D Glenboig Union Fireclay Co Ltd vs The Commissioner of Inland Revenue 12 Tax Cases 427 Senairam Doongarmall vs Commissioner of Income tax Assam at 406 Commissioner of Income tax UP vs Gangadhar Baijnath  Commissioner of Income tax Poona vs Manna Ramji and Co  Van Den Berghs Ltd vs Clark HM Inspector of Taxes case British Insulated  Helsby Cables Ltd vs Atherton  Hood Barrs vs Commissioners of Inland Revenue No2 37 Tax Cases 188 Commissioner of Income tax Hyderabad Deccan vs Vazir Sultan  Sons  referred to
For levy of a balancing charge under section 102vii of the Income tax Act 1922 it was absolutely necessary that the depreciable 272 assets should have been sold at a price agreed to between the parties
The agreement under which the assessee company received logs by way of compensation in lieu of depreciable assets did not involve any transaction of sale between it and the Union of Burma
The assessee company never paid any money by way of a price in respect of assets delivered to it by the Government
Therefore the sale proceeds of these logs could not be brought to tax against the assessee company under the second proviso to section 102vii of the Income tax Act 1922
29 ID F Commissioner of Income tax vs Motors  General Stores P Ltd  referred to
The logs delivered to the assessee company in respect of the depreciable assets stores and livestock came into possession of the assessee in consequence of the agreement against surrender of all outstanding or residuary rights of the assessee to the Government
The arrangement was in consequence of nationalisation of forest operations
The fact is that the assessee company did not mix up these logs with any of the stock in trade held by it in its ordinary course of business
The sale proceeds of these logs could not therefore be held to have been received by the assessee company on revenue account
Consequently the excess realisation received over the cost incurred in getting delivery of these logs was not liable to tax under the Act
29 IG H 292A C 4
Nothing was paid by the Government to the assessee company in connection with 13rd area of the forest leases taken over from the assessee company
The assessee company had filed a suit in connection with the timber logs and stores taken over by the Government and succeeded in obtaining a decree
The sum awarded in the decree in lieu of the rights which the assessee company had under cl 27 of the agreement could not therefore be taxed
292F G 5
Normally in trade there are two types of capital one circulating and the other fixed
Fixed capital is what the owner turns to profit by keeping it in his own possession circulating capital is what he makes profit of by parting with it and letting it change hands
What is capital assets in the hands of one person may be trading assets in the hands of the other
The determining factor is the nature of the trade in which the asset was employed
287A C