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

In 1915, the Court of Wards representing the proprietor of the Ramgarh Estate granted a prospecting licence to Messrs. Bird and Co., of an area of coal-bearing lands described as the Karanpura Coal Fields. The licence was for 12 years but was renewable for another term of 12 years. The licence reserved to the licensee the right to take coal mining leases of the Karanpura Coal Fields or any part thereof. The licence was transferable. The assessee Company was incorporated in 1920. The objects for which the assessee Company. was formed, inter alia, were :"(1) to purchase and acquire from the owners or proprietors thereof or other persons interested therein underground coal mining, 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 and 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 for after the execution thereof the agreement referred to in Art. 3 of the Company) Article., 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 appear 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, tile cement 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 companys objects and to buy, sell, manufacture, and deal in minerals, plants, machinery implements, conveniences, provisions, and things capable of being used in connection with prospecting, mining or metal lurgical 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 interest, therein, and any rights over or connected with land, and either to retain the same for the purpose of the companys business or to turn the same to account as may seem expedient.. . . . . . . . . .. .. . . . .. ... .. . .. ....(52) 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."3. On May 30, 1921, Messrs. Bird and Co., assigned their rights under the prospecting licence to the assessee Company. The assessee Company then acquired from time to time diverse coal mining leases over areas aggregating 20,000 standard bighas. The assessee Company developed these coal fields by providing means of communication, etc., and then sub-leased them to collieries and other companies. In the head leaseses which the assessee Company had obtained, the term was 999 years. In the sub-leases the term was the balance of the period minus 2 days. Apart from obtaining head leases, developing the coal fields and sub-leasing its rights, the assessee Company admittedly did not do any business. It never worked the coal fields with a view to raising coal; nor did it acquire or sell coal raised by the sub-lessees. As a condition of the acquisition of the head leases, the assessee Company had paid salami at the rate of Rs. 40 per standard bigha, and had agreed to pay royalty at certain rates. From the sub-lessees, the assessee Company charged salami at the rate of Rs. 400 per standard bigha and royalties at higher rates. For the assessment year, 1949-50, the assessee Company realised Rs. 19,14,035 as salami for the mining sub-leases granted in the relevant account year, and in the assessment year, 1950-51, it realised Rs. 3,96,000 on the same account. We are not concerned with the income of the assessee Company arising from the enhanced royalty because the assessee Company admit that that income would be taxable assessee Companys contention that the excess amount realised by way of increased salami was on capital account and could neither be included in the assessable income for purposes of income-tax nor in the profits for purposes of business profits tax was rejected. Two orders in the income-tax cases and two in the business profits tax cases were passed on January 30, 1952. The assessee Company filed four appeals before the Appellate Assistant Commissioner, who dismissed them on March 31, 1953. Four appeals. were then filed before the Income-tax Appellate Tribunal, Calcutta Bench, but were dismissed by a common order dated December 31, 1953. The Appellate Tribunal was then moved for a reference in all the four appeals, and the common question to which we have referred, was raised and referred by the Tribunal with the result already indicated.4. The Tribunal as well as the High Court held that in acquiring the head leases and in granting the sub-leases, the assessee Company, was carrying on a business within its Memorandum of Association and the increased salami received from the sub-lessees represented profits of that business liable to be included in the assessable income for income-tax purposes and in the profits, for purposes of the business profits tax. The case of the assessee Company was that it was holding its capital asset, namely, the mining leases through its sub-lessees during the relevant accounting years, and its activities were the management of the leasehold right, selection of sub-lessees, collection of rents or royalties which did not amount to the carrying on of a business. In return for the charge of salami, the assessee Company transferred only the general right to the benefits under the leases, and that was a realisation of its capital within the ruling of the Privy Council in Kamakshya Narain Singh v. Commissioner of Income-tax, B. and O. 70 Ind App 180 : (AIR 1948 PC 153). In transferring this general right, it was contended, the position of the assessee Company was indistinguishable from that of a land owner, who collected rents. All these arguments were advanced before the Tribunal as well as before the High Court but were not accepted.

Court's reasoning:
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.