# [1986] 3 S.C.R. 269

- **Citation:** [1986] 3 S.C.R. 269
- **Court:** Supreme Court of India
- **Decided:** 1986-07-16
- **Case number:** Civil Appeal Nos. I of H 1974 and 1355-1356 of 1973
- **Bench:** Sabyasachi Mukharji, K.N. Singh
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1986-3-s-c-r-269-9165
- **Pages:** 25

## Headnote

Income-tax Act, 1922, s. JOC2)(vii),lfncome-tax Act, J96J:"'y_ 41111
· Assessee--Nationalisation of business-Compensation recci1'ed
from Government-Whether capital or revenue receipt-Compensation
in kind in respect of depreciable assets-Whether liable to tax-Fixed
capital and circulating capital-distinction between.
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The assessee-Company, carrying on business of selling timber in
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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
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period of 15 years to remove the log,• 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 1st January 1926
and 3 lst December, 1940 was the due dale of expiry. However, before
the expiry of the period, the Second World War started and the GovF
ernment 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, JO, 1949. In terms of an
agreement dated 10th June, 1949 between the parties the assessee made
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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 28,847 tons of teak lo~s in substitution of
non-duty paid logs, 2,94(l tons against depreciable assets and stores and
12,067 tons against livestock. The logs so received by the assessee comH
7.69
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[1986] 3 S.C.R.
pany were sold off by it from time to time in the accounting years 1;49,
1950, 1951 and 1952.
The lntome-tax Oflker 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 reteipt 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 s. 66A(2) of the Income-tax
Ad, 1'122 it was tontended 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 agreement• the assessee
had no interest in land as such, it had only a right to collect and lake
away logs, its stock-in-trade, and it could not fell any fresh trees, that
28,847 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 reco1npense for its righis 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 s. 10(2)(vii) 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, bnidings etc., that the forest leas-. were not ordinary commercial

## Text

_Characters 0–39,968 of 58,769. This is a partial read: ask again with offset=39968 for what follows._

C.I.T. BOMBAY CITY
v.
A
BOMBAY BURMAH TRADING CORPORATION, BOMBAY
B
JULY 16, 1986
[SABYASACHI MUKHARJI AND K.N. SINGH, JJ.]
Income-tax Act, 1922, s. JOC2)(vii),lfncome-tax Act, J96J:"'y_ 41111
· Assessee--Nationalisation of business-Compensation recci1'ed
from Government-Whether capital or revenue receipt-Compensation
in kind in respect of depreciable assets-Whether liable to tax-Fixed
capital and circulating capital-distinction between.
c
The assessee-Company, carrying on business of selling timber in
D
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
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period of 15 years to remove the log,• 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 1st January 1926
and 3 lst December, 1940 was the due dale of expiry. However, before
the expiry of the period, the Second World War started and the GovF
ernment 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, JO, 1949. In terms of an
agreement dated 10th June, 1949 between the parties the assessee made
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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 28,847 tons of teak lo~s in substitution of
non-duty paid logs, 2,94(l tons against depreciable assets and stores and
12,067 tons against livestock. The logs so received by the assessee comH
7.69
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SUPREME COURT REPORTS
[1986] 3 S.C.R.
pany were sold off by it from time to time in the accounting years 1;49,
1950, 1951 and 1952.
The lntome-tax Oflker 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 reteipt 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 s. 66A(2) of the Income-tax
Ad, 1'122 it was tontended 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 agreement• the assessee
had no interest in land as such, it had only a right to collect and lake
away logs, its stock-in-trade, and it could not fell any fresh trees, that
28,847 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 reco1npense for its righis 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 s. 10(2)(vii) 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, bnidings etc., that the forest leas-. 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 aL'<jUisition of assets of th< business under the take-over
agreement, that the assessee was prevented from carryin~ on business
upon the nationalisation of forest resources and acquisitiun 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.
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Dismissing the appeals, the Court,
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C.I.T. "· BURMAH TRADING CORPN.
271
HELD: I. I. The forest leases constituted capital assets of the assessee. The payments made for cancellation or sterilization of the right' under
these leases were, therefore, capital receipt' and not liable to tax. [290E]
1.2. 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 acqnisilion of that capital asset, such pay .nent 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 snm 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, he
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 assessec-Company's activities could not be regarded as an
income receipt, nor the legal character of the payment misjudged hy the
magnitude of the payment. [289A; 290C-D]
G/enboig Union Fireclay Co. Ltd. v. The Commissioner of Inland
Revenue, 12 Tax Cases 427; Senairam Doongarmall v. Commissioner
of Income-tax, Assam, 42 I.T.R. 392 at 406; Commissioner of Income-
/ax, U.P. v. Gangadhar Baijnath, 86 I.T.R. 19; Commissioner of
Income-tax, Poona v. Manna Ramji and Co., 86 I.T.R. 29; Vim Den
Berghs Ltd. v. Clark (H.M. Inspector of Taxes), 3 I.T.R. 17 (En~lish
case): British Insulated & Helsby Cables Ltd. v. Atherton, [ 1926] A.C.
205; Hood Barrs v. Commissioners of Inland Rei·enue (No. 2), 37 Tax
Cases 188; Commissioner of Income-tax, Hyderabad-Deccan v. Vazir
Sultan & Sons, 36 I.T.R 175, referred to.
2. For levy of a balancing charge under s. 10(2)(vii) of the
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Income-tax Act, 1922 it was absolutely necessary that the depreciable
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11986) 3 S.C.R.
assets should have been sold at a price agreed to between the parties.
ThP agrPement 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 s. 10(2)(vii) of the Income-tax Act, 1922. [29 ID-F)
Commissioner uf lncume-tax v. Motors & General Stores (P)
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Ltd., 66 I.T.R. 692, refen·ed to.
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3. 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.
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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 Ioi;s could not, therefore, be held to have been
received by the assessee company on revenue account. Consequently,
the excess realisation recf.ived over the cost incurred in getting delivery
of these logs was not liable to tax under the Act. [291G-H; 292A-C)
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4. Nothing was paid by the Government to the assessee company
in connection with I/3rd 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
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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
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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. [287 A-Cl
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. I of
H
1974 and 1355-1356 of 1973.
C.l.T. "· BURMAH TRADING CORPN. [MUKHARJI,J.l
273
From the J udgmcnt and Order dated 22i24.4. l 970 of the
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Bombay High Court in l.T.R. No. Ill of 1963.
B.B. Ahuja and Miss A. Subhashni for the Appellant.
F.N. Kaka, S.N. Talwar, Y. Chaudhary and H.S. 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 22ndi24th
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April, 1970. These are by certificate granted by the High Court under
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section 66A(ii) of the Indian Income-tax Act, 1922. The judgment
under appeal is reported in 811. T .R. 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, 1950, 31st May, 1951 and 31st May, 1953.
The assessee·is a public limited company limited by shares. lt
derived income from several sources including certain business operations. These operations were carried out in India and abroad and used
to be carried out, inier 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 Govemn1ent
of Burma. In the year of account ending on 3 lst 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 payD
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[1986 J 3 S.C. R.
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 44(2) 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 !st 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 2/3rds 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
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C.l.T. v. BURMAHTRADINGCORPN. [MUKHARJl,J.[
275
of all the assets pertaining to the forest leases, viz., headquarters,
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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 50 ,000 tons of teak logs of
the specified qualities mentioned in clause 7 of the said agreement.
8
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 43,860 tons of logs to the assessee-company.
There was no dispute that those 43,860 tons of logs were delivered
against three kinds of assets in the following quantities:
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(1) 28, 847 tons against non-duty paid logs handed over by the
asseessee-company to the Government.
(2) 2,946 tons against depreciable assets like land and buildings,
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launches, furniture and stores.
(3) 12,067 tons against livestock like elephants, etc.
The account of these 43 ,860 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 43,860 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 Rs.1,35,55,611 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
inturred costs for getting delivery of these logs at the rate of Rs.225
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 18,676 tons of logs. The sale
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[1986] 3 S.C.R.
proceeds of Rs.65,52,153 were received in respect of non-duty paid
logs delivered to the assessee-company. The sale proceeds of
Rs.31,980 were received in respect of logs received against depreciable
assets, ~tores and livestock. For the accounting year ending 31st May,
1951, the Income-tax Officer held that the assessee had received in all
16,299 tons of logs. The sale proceeds of those logs were allocated as
follows:
"Rs.5,78,896 in respect of non-duty paid logs handed over by the
assessee-company to the Government, Rs.2,69,975 in respect of the
logs delivered against handing over of depreciable assets, stores and
livestock." (81 I.T.R. p. 785.)
The question that arose upon such allocations having been made
in the manner indicated was as to whether the receipt of Rs.65,52, 153
in the accounting year ending 31st May, 1950, and Rs.5,78,896 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 Rs.31,980 in the accounting year ending 31st
May, 1950, and Rs.2,69,975 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 43,860 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 asscssee-company that the assessee's business
had not stopped and there was no question of sterilization of its business. The forest leases o"med 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 reH
ferred to certain residuary rights under clause 27 of the agreement
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C.I.T.v. BURMAHTRADINGCORPN.[MUKHARJJ,J.[
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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 Rs.225 per ton.
After having recorded the findings in the aforesaid manner, the
Tribunal referred to the High Court concerned. i.e., 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:
1. . ........... .
2. Whether, on the facts and in the circumstances of the
case, the amount of Rs.65,52,153 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 Rs.1,41, 156 was liable to tax under the
second proviso to section 10(2)(vii) 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 Rs.5,250, Rs.1,025 and Rs.25,705,
being the excess realisations over Rs.225 per ton for logs
received in respect of depreciable assets, stores and live-.
stock, respectively, were liable to tax under the Act?"
"JI. Assessment year 1951-52:
1. . .......... .
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2. Whether, on the facts and in the circumstances of the
case, the amount of Rs.5,18,896 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 ofRs.44,407, Rs.8,639 and Rs.2,16,929,
being the excess realisations over Rs.225 per ton for logs
received in respect of depreciable assets, stores and livestock, respectively, were liable to tax under the Act?"
Similarly for the asSt$sment 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 Rs.5,58,188 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 Rs.9,493, 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 ne'gative, for the assessment year 1951-52 the serond 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 bf 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:
Generairights"l. The Contractor shall within the series of coupes into
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of contractor: which the forest area described in Schedule I and hereinafter
C.I.T. v. BURMAH TRADING CORPN. JMUKHARJI, J.J
279
referred to as "the Concession Area" shall be subdivided
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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
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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
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(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.
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Grant of other rights 2, The Government acting on behalf of the Secretary of
in Concession Area. State reserves to itself the 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 I the whole or from any part of the Concession Area."
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The proviso to that clause need not be set out.
Clause 4( I) was as follows:
Period during
4. (I) This Agreement shall come. into force on the 1st day
~hich Agreement of January, 1926 and shall unless previously terminated unis in force.
der clause 26 or clause 29 terminated after the expiry of a
period of fifteen years; viz. on the } !st day of December,
1940;
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PROVIDED that in respect of the rights conferred by
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SUPREME COURT REPORTS
[1986] 3 S.C.R.
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 respon- 19. Nothing herein contained shall be deemed to relieve
sibilities of
the Contractor, his agents and servants of the duty of comD Contractor.
plying with any Act of the legislature and of the rules thereunder at the time being in force and applying to the Concession Area.
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F
20. With thirty days from the dates respectively on which
measurement statf:ments 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 timber "21. The Contractor shall be entitled to have the timber
after Measuremenfwhich has been measured for royalty marked at the time of
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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:
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"23. Until teak timber has been marked and royalties have
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C.I.T. v. BURMAH TRADING CORPN. JMUKHARJl,J.]
281
~ Teak timber is
been paid thereon in accordance with the preceding clause
A
Government pro- it shall be deemed to be the property of the Government
perty up to the payand the Contractor shall have no right to sell mortgage or
mentofroyalty.
h
h
.
h
r
h
,,
ypot ecate 1t or create any c arge ot 1en t ereon.
Clause 27 of the agreement provides as follows:
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"27. On the conclusion of the period specified in clause .J
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 rec
moving 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
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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 conces-
....
sion area under any new agreement whether with the present contractor or with other parties subsequent to this
E
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
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him to dispose of such of his buildings, mills, railways or
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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
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the agreement at any time by giving two years notice in writing.
f
On the 1st January, 1926, there was commencement of the agreement. 31st December, 1940 was the due date of expiry of the agreemen!. On 7th April, 1942, there was extension by the Government.of
Burma of the long term agreement till such time as it became possible
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SUPREME COURT REPORTS
11986] 3 S.C.R.
A
to resume forest operations and for such further period as might be
'r·
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
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of Burma on the other hand for exploitation of forests. On 4th
February, 1948, tbere was the assessee's lett~r to the Government of
Burma indicating their specific rights under the Forest Agreement in r
respect of logs in the course of extraction on termination of agreements.
_,......._
c
On !0th 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 expird on !st May, 1947.
)._
Government's decision to terminate long term pending lease negotiaD
lions 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
...
E
rights under clause 27 of th" 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
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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.
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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 (81
I
I.T.R. 777) betwee1< the Government of Burma and the assessee comH
pany. The said discussion recorded is as follows:
C.I.T. v. BURMAH TRADING CORPN. [MUKHARJI, J.]
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 stockin-trade and the assessee was not a purchaser of any stockin-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 and/or to fell, convert and remove
that was given to the assessee was to be exercised in respect
of the growing forest trees and/or 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."
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 10(2)(vii) of Indian Income-tax Act, 1922 in
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B
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respect of the amount of Rs. l ,41, 156 for the assessment year 1950-51
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SUPREME COURT REPORTS
[1986] 3 S.C.R.
A
and for 1951-52 whether the amounts of Rs.44,407, Rs.8,639 and
Rs.2,16,929, 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.
B
The main submission by Shri B.B. Ahuja on behalf of the revenue 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 contracts 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
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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.
0
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 28,847 logs received by the assessee under the agreeE
ment 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 asF
sessee's company's main income was from felling the trees and carried
on the said business on an extensive scale.
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H
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 4(2) of the lease agreement
appearing at page 30 of the Paper Book. The Forest leases, it was
_:;.•
...
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C.l.T. v. BURMAH TRADING CORPN. IMUKHARJ!, J. I
285
urged by him, were not ordinary commercial contracts made in the
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. v.
Clark,3 I.T.N.. 17 at 25 and also Hood Bars v. 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. (I) 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
u tier the residual rights the assessee could only carry on the operat1.,hs 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 43,860 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 submi•ted that one lump sum wnsideration
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
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A
B
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D
E
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286
SUPREME COURT REPORTS
[1986] 3 S.C.R.
p. 82.