Case: Karanpura Development Co., Ltd Vs. The Commissioner Of Income-Tax, West Bengal

taxed under Sch. A could not be taxed under Sch. D. The company demanded a case. Rowlatt, J. held against the company, but his decision was reversed by the Court of Appeal. On further appeal to the House of Lords, it was held that the rents were profits from ownership of land and assessment under Sch. A was the proper made and they could not be treated as trade receipts of the company for purposes of Sch. D. The assessee company has relied upon certain passages in the speeches of the learned and noble Law Lords, one of which from the speech of Lord Warrington of Clyffe has already been quoted. It is not necessary to quote the other passages except one from the speech of Lord Tomlin because the purport is the same. Says Lord Tomlin:"Further in my view the perception of rents as land owner is not an operation of trade within the meaning of the Act, If this be so. I am unable to appreciate how the existence of ancillary activities which produce profits taxable under Schedule D can affect the nature of the operation or how the legal significance of the perception is altered for the purpose of income-tax if the recipient is a limited company rather than an individual".As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The dividing line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealing with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned.22. Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property" (S. 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader. The cases which have been cited in this case both for and against the assessee Company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter. Californian Copper Syndicate case, (1904) 5 Tax Cas 159 illustrates vividly dealings with mineral rights and concessions by a company as part of the objects of its business, or, in other words, in the doing of the business. The Calcutta cases and the case of 1930 AC 432 illustrate the contrary proposition. There, the property, though dealt with by a company intending to do business, was dealt with as landowner. The intention in those cases was not to derive profit by business done with those properties but to derive income by renting them out. Where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation.23. We shall now turn to the present case, because it remains to consider what the assessee Company was doing with the head leases. The relevant clauses of the Memorandum of Association of the assessee Company have already been quoted. They show the various objects for which the assessee Company was incorporated. Though power was taken under cls. (2), (3), (6) and (34) to do business of coal-raising, etc., the assessee Company did not do the sort of business authorised there. It restricted its business to cls. (1) and (52). Under cl. (1), power was taken to purchase and acquire underground coal-mining and relative rights. Under cl. (52), power was taken to sell improve, manage, develop, exchange, lease, mortgage, dispose of, turn to account or otherwise deal with all or any part of the property and rights of the Company. Business was done extensively within these two clauses. Annexure F shows the areas which were sub-leased. A glance at the chart shows the large number of sub-leases and the different companies to which the subleases were granted. These sub-leases were granted because the, assessee Company wanted as a matter of business, to turn its rights to account. The assessee Company opened out, and developed the areas, and then granted these sub-leases with an eye to profit. It is clear from these operations that the assessee Company having secured a large tract of coal-bearing land parcelled and developed it into a kind of stock-in-trade to be profitably dealt with. The assessee company extended its business along these lines acquiring fresh fields. In the circumstances the nature of the business was trading within the objects of the Company and not enjoyment of property a land owner. There was also no sale of its fixed capital at a profit. In our opinion, the High Court rightly answered the question against the assessee Company.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]5. The Income-tax Act puts the tax on income, profits and gains irrespective of the source from which they are derived. Sec. 3 of the Act provides, inter alia, that income-tax shall be charged on the total income of every company. Under S. 4(l) total income includes all income, profits or gains from whatever source derived, subject to certain conditions about residence, etc., with which we are not concerned. Section.6 then enumerates six heads of income chargeable to income-tax. Two of these heads are (a) income from property and (b) profits gains of business, etc. The several heads into which income is divided under the Income-tax Act do not make different kinds of taxes. The tax is always one; but it may arise from different sources to which the different rules of computation have to be applied. The manner of this computation is indicated in the sections that follow. Before income, profits or gains can be brought to computation, they have to be assigned to one or more heads. These heads are in a sense exclusive of one another, and income which falls within one head cannot be assigned to, or taxed under another head.The profits of a business are calculated under S. 10 of the Act. Under that section, tax is payable by a company under the head "profits and gains of business...." in respect of the profits or gains of any business carried on by the company. In Section 2 (4) of the Indian Income-tax Act, "business" has been defined to include any trade, commerce or any manufacture or any adventure or concern in the nature of trade, commerce or manufacture. In all cases where an assessee questions the finding that assessable profits or gains have been made in a business, it is customary to find the assessee questioning that a business has at all been carried on, and further that the return is on the capital account and not revenue. This well-trodden path was also followed in this case, and the assessee Company has raised 3 contentions. It contends that the return to it as salami represented merely a capital return because in acquiring the mining lease the assessee Company acquired two distinct rights, (a) the general right to the benefits under the leases for which consideration was the salami, and (b) the right to carry on business in coal. According to the assessee Company, it never exercised the second right, and when it parted with the first right, it only realised its capital. This is the first contention. The assessee Company next contends that there is no difference between an individual owning properties and selling them, on the one hand, and a company owning mining leases and issuing sub-leases, on the other, because in either case there are no profits or gains of business, if no business is done. Lastly, it contends that even if the assessee Company was carrying on business, it was not carrying on a trading activity but its activities consisted in merely collecting rents or royalties which taken with the performance of other necessary and allied activities could not amount to the carrying on of a business resulting in increased salami as profits of the business.The case, of course, is one to when the warning often given that it is not desirable to rely upon decisions under different taxing statutes would seem applicable; but in the judgment of the Privy Council, it is made clear that the Rhodesian Act was not different from the British law. The decision also rests, not upon the provisions of any special enactment but upon the more general consideration whether such receipts can be considered in a business sense as belonging to capital account or revenue and in what circumstances.Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property" (S. 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader. The cases which have been cited in this case both for and against the assessee Company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of theWe shall now turn to the present case, because it remains to consider what the assessee Company was doing with the head leases. The relevant clauses of the Memorandum of Association of the assessee Company have already been quoted. They show the various objects for which the assessee Company was incorporated. Though power was taken under cls. (2), (3), (6) and (34) to do business of coal-raising, etc., the assessee Company did not do the sort of business authorised there. It restricted its business to cls. (1) and (52). Under cl. (1), power was taken to purchase and acquire underground coal-mining and relative rights. Under cl. (52), power was taken to sell improve, manage, develop, exchange, lease, mortgage, dispose of, turn to account or otherwise deal with all or any part of the property and rights of the Company. Business was done extensively within these two clauses. Annexure F shows the areas which were sub-leased. A glance at the chart shows the large number of sub-leases and the different companies to which the subleases were granted. These sub-leases were granted because the, assessee Company wanted as a matter of business, to turn its rights to account. The assessee Company opened out, and developed the areas, and then granted these sub-leases with an eye to profit. It is clear from these operations that the assessee Company having secured a large tract of coal-bearing land parcelled and developed it into a kind of stock-in-trade to be profitably dealt with. The assessee company extended its business along these lines acquiring fresh fields. In the circumstances the nature of the business was trading within the objects of the Company and not enjoyment of property a land owner. There was also no sale of its fixed capital at a profit. In our opinion, the High Court rightly answered the question against the assessee Company.