# SUPREME OOURT REPORTS [1962] KAH.ANPURA DEVELOPMENT CO~, LTD v. THE 00l\ll1ISSWNER OF INCOME-TAX, WEST BENGAL

- **Citation:** [1962] 3 S.C.R. 368
- **Court:** Supreme Court of India
- **Decided:** 1962
- **Case number:** Civil Appeal Nos. 376 to 379 of 1960
- **Bench:** P. B. GAJENDRAGAD:KA.R; K. SUBBA RAo, M. Hidayatullah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/supreme-oourt-reports-1962-kah-anpura-development-co-ltd-v-the-00l-ll1isswner-2451
- **Pages:** 24

## Headnote

.
Income Ta:1:-.Appreciation of Capital or projil3 of busine/1110ompanyformedfor acquiring and WQrking coal minin(! lea11uOompany developing coal field8 and 11Ub·lea.9ing t!Mm-Income
reali11ed by u:ay of increa11ed salami-If amounl11 to projit11 of
bu8inu11-Lia.bility to tax-Indian lncome-ta:1:
.Act,
1922
(11 of 1922) 1111. 2(4). 10.
· The asseS!'ee company was incorporated in 1920 with the
objects, inter alia, of acquiring underground coal-mining and
relative rights and to do business of coal raising etc. Power
was given under the memorandum of association to lease,
devel11p or otherwise deal with the property and rights ·of
the · company. The assessee acquired from time to time
diverse coal·mining leases and after developing the coal-fields
by providing mearu of cummunication etc., sub-leased them
to collieries · and other companieJ. As a condition of the
acquisition of the head lea~s the as5('5see had paid 11alami at
the rate of Rs. 40/- per standard Li~ha and had agreed to
pay royalty at certain rate.•, while from the sub-leas('s it
charged 11alami at the rate of Rs. 400/· and royalties at higher
rates. For the assessment years 1949-50 and 1950..51 the
a!Seal>ee admitted the liability to LIX in respect of the income
arising from the enhanced royalties, but claimed that the
exce'\S amount realised by way of increased 1alami was an
appreciation of capital and could not be taxed on the ground~
tl' .. t apart from obtaining head leases, developing the coal
field• and tub-leasing its rights, the assessee did not do any
business, either by working the coal-fields with a view to
railing coal or by acquiring or se!Jing coal ra~ed by the sublessea.
Held, that the asseuee company lu acc1uirir~g the head
I~
and in granting the sub-le~~ was carry111g on a bwsiness
wuhm Its memorandum of a.ssocratwu and that the increa.:red
.alami received from the sub-lessees n-presented profits or that
business, liable to be included in the assessable Income for
purp11.se1 Income-tax and business profits tax.
Kama~/iya }.'arain Singh v. Oommiuiontr of lnc(n/HJ•Ia11
(1943) L.R, 70 I.A. 180, di:ltinguuhed.
.
,Oalifornian Copptr B!J11dKatt (Umiled and Rtduc~d) v.
lla-rn•, (190-t) .5 T,G. 159, rdied on,
Case-law d~~d.
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.. ,.
..
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3 S.C.R.
. SUPREMECOURT REPORTS
369
CrvrL APPELLATE JumsDICTION: Civil Appeal
Nos. 376 to 379 of 1960.
Appeal from the judgment ancl order dat~d
September 18, 1958, of th•; Calcutta High Court m
Income-tax Reference No. IOI of 1954.
S. JJJUra, S. N .. Mukhe1jee and B. N. Ghosh, for
the appellants.
111. 0. Setalvad,
Attorney-General
R. Ganapathy Iyer
and P. D. ,Menon,
respondents.
of lnd·ir.i,
for
the
1961. August 31. The Judgment of the Court
was delivered by
HrnAYATULLAH, J. ··-These arc four appeals
filed by the assessee Company 1Karanpura Development Co., Ltd.) in respect of two assessment years,
1949-50 and 1950-51 and two chargeable accounting
periods under the Business Profits Tax Act, January 1,
1948, to December 31, 1949. By these appeals,
the assessee Company impugns the judgment of the
High Court of Calcutta dated September 18, 1958,
answering a common question "whether on the facts
and in the circumstances of the case, the sums received as salami by the assessee for granting sub-leases
were trading receipts in its hands and the amount
of profit therein is assessable under the Indian
Income-tax Act" in the affirmative and against tho
assessee Company. The case was certified to this
Court by the High Court under s. 66A (2) of the
Income-tax Act presumably also read with s. 19 of
the Business Profits Tax Act.
The facts of the case are as follows : In 1915,
the Court of Wards represpnting the proprietor of the
Ramgarh Estate granted a prospecting licence to
Messrs.
Bird & 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

## Text

_Characters 0–39,997 of 49,687. This is a partial read: ask again with offset=39997 for what follows._

JQ61
dllgsul31.
368
SUPREME OOURT REPORTS
[1962]
KAH.ANPURA DEVELOPMENT CO~, LTD.
v.
THE 00l\ll1ISSWNER OF INCOME-TAX,
WEST BENGAL
(P. B. GAJENDRAGAD:KA.R; K. SUBBA RAo and
.
M. HIDAYATULLAH, JJ.)
.
Income Ta:1:-.Appreciation of Capital or projil3 of busine/1110ompanyformedfor acquiring and WQrking coal minin(! lea11uOompany developing coal field8 and 11Ub·lea.9ing t!Mm-Income
reali11ed by u:ay of increa11ed salami-If amounl11 to projit11 of
bu8inu11-Lia.bility to tax-Indian lncome-ta:1:
.Act,
1922
(11 of 1922) 1111. 2(4). 10.
· The asseS!'ee company was incorporated in 1920 with the
objects, inter alia, of acquiring underground coal-mining and
relative rights and to do business of coal raising etc. Power
was given under the memorandum of association to lease,
devel11p or otherwise deal with the property and rights ·of
the · company. The assessee acquired from time to time
diverse coal·mining leases and after developing the coal-fields
by providing mearu of cummunication etc., sub-leased them
to collieries · and other companieJ. As a condition of the
acquisition of the head lea~s the as5('5see had paid 11alami at
the rate of Rs. 40/- per standard Li~ha and had agreed to
pay royalty at certain rate.•, while from the sub-leas('s it
charged 11alami at the rate of Rs. 400/· and royalties at higher
rates. For the assessment years 1949-50 and 1950..51 the
a!Seal>ee admitted the liability to LIX in respect of the income
arising from the enhanced royalties, but claimed that the
exce'\S amount realised by way of increased 1alami was an
appreciation of capital and could not be taxed on the ground~
tl' .. t apart from obtaining head leases, developing the coal
field• and tub-leasing its rights, the assessee did not do any
business, either by working the coal-fields with a view to
railing coal or by acquiring or se!Jing coal ra~ed by the sublessea.
Held, that the asseuee company lu acc1uirir~g the head
I~
and in granting the sub-le~~ was carry111g on a bwsiness
wuhm Its memorandum of a.ssocratwu and that the increa.:red
.alami received from the sub-lessees n-presented profits or that
business, liable to be included in the assessable Income for
purp11.se1 Income-tax and business profits tax.
Kama~/iya }.'arain Singh v. Oommiuiontr of lnc(n/HJ•Ia11
(1943) L.R, 70 I.A. 180, di:ltinguuhed.
.
,Oalifornian Copptr B!J11dKatt (Umiled and Rtduc~d) v.
lla-rn•, (190-t) .5 T,G. 159, rdied on,
Case-law d~~d.
-
-
.. ,.
..
-\, .
3 S.C.R.
. SUPREMECOURT REPORTS
369
CrvrL APPELLATE JumsDICTION: Civil Appeal
Nos. 376 to 379 of 1960.
Appeal from the judgment ancl order dat~d
September 18, 1958, of th•; Calcutta High Court m
Income-tax Reference No. IOI of 1954.
S. JJJUra, S. N .. Mukhe1jee and B. N. Ghosh, for
the appellants.
111. 0. Setalvad,
Attorney-General
R. Ganapathy Iyer
and P. D. ,Menon,
respondents.
of lnd·ir.i,
for
the
1961. August 31. The Judgment of the Court
was delivered by
HrnAYATULLAH, J. ··-These arc four appeals
filed by the assessee Company 1Karanpura Development Co., Ltd.) in respect of two assessment years,
1949-50 and 1950-51 and two chargeable accounting
periods under the Business Profits Tax Act, January 1,
1948, to December 31, 1949. By these appeals,
the assessee Company impugns the judgment of the
High Court of Calcutta dated September 18, 1958,
answering a common question "whether on the facts
and in the circumstances of the case, the sums received as salami by the assessee for granting sub-leases
were trading receipts in its hands and the amount
of profit therein is assessable under the Indian
Income-tax Act" in the affirmative and against tho
assessee Company. The case was certified to this
Court by the High Court under s. 66A (2) of the
Income-tax Act presumably also read with s. 19 of
the Business Profits Tax Act.
The facts of the case are as follows : In 1915,
the Court of Wards represpnting the proprietor of the
Ramgarh Estate granted a prospecting licence to
Messrs.
Bird & 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
1961
J..Granpura
Du·eloftment Co.,
Ltd.
v.
Tht Commissioner
of lncome·tax,
f'Vest Bengal
f!idayatultah ].
1961
A·aranpura
1Jt1doprr:r11t (,,,,,
LIJ.
v.
1·1i, CoNuniJ,i1111rr
tlf /11eume•la.,,
ll'e1l lJnrgal
I lidr'.) aftii!ch } .
3i0
SUPHE'.l!E COCR1' REPORTS
r wo2J
]icl'ncc was transferable. The n.sscssec Compauy -' .. •
was incurporate<I in 1!):!0.
The objcl"ls for which
the ll8Sessec Company was formed, inter ali11, \1·crl' :
"(I) to purd1asc anJ acquin· from the
O\n;<.>rn {ll" proprietor' thereof or other persons
interested therein unclergrouml coal mining,
n·l11tirn rights of aml in the Karaupura Coal
Field8 in tho Pro\"inco of Bihar and Orissn. at
., · -
such pri<'e or pric<.:s for such period or pcrio<ls
and generally upon such terms and conditions
as the Dirl'C'tors may dct~rmine and for that
•
purpose to adopt, .. enter into and <"Urry into
effect a.II contracts, agreements ai1d other
docum<'nl>, and in parti<'uln.r to enter into and
carry into eff<·ct, with 01· \rithout modifications, cith<'r before or after tlw executio11
•
thereof, the agrnement referred to in Article 3
of thc Company's Art.ielcs of Association.
(2) To sell, <lisposc of and othe1wi8e tic-al
in all such undcl'gronncl coul mining am! rein·
tive rights upon such terms ancl con<litiuns as
may appear for the benefit of the company.
(3) To carry on the trades or businesses of
i:ollicry proprit•tors, coal merchants, minorn,
smelters, cngineerR, Iimcburnern and rnanufllcturerR of brick, tile, ('Cment, lime, c:okc and
other bye-products of coal in all their respective branches.
x
x
x
(G) To prospect
for,
crush,
win, get
quarry, smelt, calcine, refine, dress, amalgamate, manipulate and prepare for market coal,
ore, metal, an<l
mineral substances of all
kinds, and to carry on any other prospecting,
mining or metallurgiCRI operations, which may
•cem conducive to any of the company's.
objects and to buy, sell, manufacture, and deal
in minera]H, plants, .machinery implements,
conveniences, provisions, and things capable
of being used in connection with prospecting,
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3 S.C.R. SUPREME COURT REPOHTS
37l
mining or metallurgical operations or required
by workmen or others employed by the
company.
x
x
x
( 34) To acquire by purchase, lease, exchange, or otherwise, lands, buildings, and
heraditaments 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
comp:my's business or to turn the same to
account as may seem expedient.
x
x
x
( 52) To sell, improve, managa, dev\)lop,
exchange, lease, mortgage, dispose of, turn to
account, or otherwise deal with all or any part
of the property and rights of the company."
On May 30, 1921, Messrs. Bird and Co.,
assigned their rights under the prospecting licence
to the asscssee 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 leases which the
assessee Comp'.lny had obtained, tho term was 999
years. In the sub-leases the term was the balance
of the p9riod minus 2 days. Apart from obtaining
head leases, developing the coal fields and subleasing 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 as8essee
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
1961
J(aranpura
Devrlopment Co.,
ltd.,
v.
The Commis~ioner -
of b1come-t~,
H'e~-t Bengal
Hidayatullah J.
J. ·m rmpi.1 ,,.
lJ6<."llof'•1unt f:a_,
/,td.
v.
'/ht C1m.mi\•i1J!lf1
r;j /rl('illlt·ltH,
ll'ti! Btn.~ai
I //dr.;·fifullah].
3i2
StJPREi\IE COUld .tEPORTS
[ 1962)
:;tamlarcl higha ancl ro:rnltics at hight>r rates. For
the <lssc,;smcnt year, l!l-!!)-50, the afificssec Company
r<·alise<l l{~. J!),14,0:l:i as sala.mi for the mining sttlJIPaSPS gmntcd in tlw relPYant ae<:<Hlllt ~·,.ar, awl in
the assessmcut year, J:lti0.51, it realised H:<. a,!)(),000
Oil the same account..
\Ve are not conccrnccl with
the inconw of asscssce Company arising from the
enhanced royalties, bceause tlw assc:;;:;ce Company
admitkd that that income would Le taxttble. Tho
ass<'ssPO Company's eontPntion that the exc<·ss
ammmt realised by way of increase<! salnmi \HIS on
capital al'count am! <'ould neither be inclurfocl in the
assessable in<'ome for puq>O><l'fl of incunw-tax uor in
the prufit.s for purposes of business profits tax was
n·jeekil. Two orders in the income-tax <'ases ancl
two. in tko businl'ss profits tax eas .. s were passed
011 January :10, I !)5:!.
The asscssee Company filed
four appeals before the Appellate Assist;mt Commissioner, who clismiss<•d them on ;\lard1 31. I!J53.
Four appea Is WPrc then Jilcd Lefore the fncome-tax
Appel1"k Tribunal, Cal.,utta Be11ch, but were dismissed bv a common order <lated December :ll,
I !lii3.
The Appellate Tribunal was then nHnT<l for
a referon"c in all tho four appeals, and the common
question to which we ha\'c reft'rred, was raise<! am!
referred by the Trilnmal with the result alrea<ly indicated.
The Tribunal as well as the High Court hcl<l
that in acquiring the head ler.ses and in granting
the sub-leases, tho assessee Company was carrying
on a business within it,-; :\Iemorandum of Association
and the increased salami received from tho sublessces represented profits of that business liable to
Le inclucled in the assessable income for income-tax
purpo8es and in tho profits, for purposes of the
business profits tax. '!'he c·1se of the 1J.S8c8sce Company was that it was holding it,~ capital asset namoly,. thc mining leases through its sub-lessees during
the relevant accounting y<'&rs, aud its activities
were the management of the l.caaehold right, selection of sub-lessees, collection of rents or royalties
•
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,_
•
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3 S.C.R.
SUPREME COURT REPORTS
373
which did not amrmnt 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 realisottion of its capital within the ruling of the Privy
Council in Kamakshya Narain 8ingh v. Commi,·sioner of Income-tax (1)
In transferring this general
right, it was contended, tho position of the assessec
Company was indistinguishable from of that a land
owner, who collected rents. All these arguments
were
advanced before the
Tribunal as well
a5
before the
High
Court
but
were
not
accepted. In these appeals, we are required to
consider whether the conclusions reached by the
High Court ancl the Tribunal are right .
The Incpme-tax Act puts the tax on income
profits and g!:lins irrespective of the source from
which they are derived.
Section 3 of the Act provides, inter al·ia, that income-tax shall be charged
on thA total income of every company. Under s.4(1),
total income inclu<les 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 and gains of business, etc. The several heads
into which income is divided under tho 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 comput~.
tion they have to be assigned to one or more heads.
These heads arc in a sense exclusive of one another
and income which falls within one head cannot be
assigned to, or taxed under another head.
(1) (1943) L.R. 70 I.A. 180.
196!
Karanpura
Development Co.,
Ltd.
v.
The Commissicner
of Ineome-fa\·,
Jrtst Bengal
llidayatullah J.
1961
J(ara11p111a
!Jertfof,mt!ll Co.,
l.td.
v.
·rht Commis•iJ1111
of lncflmt-:•11,
11'tit Btn~11/
llidayal'i!lr:h ].
:ni
SVPREi\IE COURT REPOHTS
[1962]
The word~ "income'" haR not been defined in the
Income-tax Act.
In the rJpfi11ition "·hich is enacted
certain r<'ceiptH ar<' s:iid to he included in the conc:Ppt of ii1comP; but it <Ines not say that "income"
ifsl'lf mean;;.
(';>rtain wod;i11g rldlnitions have
IH'cn given hy Courts, dii<·f among whirh is by the
.Juclicial nommittc·e in Commissionr-r of Iurome-to.r
,._ Slww Wr1/lrire & Co.(') whrr<' it mis hclcl that hv
irwom" is !Jl<'ant a pcrirnliral monctar.1• rec<·ipt, n~t
in th<' 11atur<> of 11. windfall but r·oming in with Rome
80rt of r«gnlarity or <·xpectccl n·gularity. In husi11<'""' it \\~•s al"' poirll.,<I out, ineonw \ra8 tlie produce
of som<·thing "]ons .. ly spokrn of as l'apital"'.
This
income in
hu:;i!ll'~S is prr,fit 11 hic-h i;; <'anw<l by a
proee;;s of prod1wtio11, <•r, in other words, by the
c1 ntirmons exercise of an netivitY.
Thes<, ohsrrvations of thc- Privy Coun1·il \\"NC· quoted with .opproval b1· this Court in mam· r<1srs ancl rt'C"r11tlv in
Sc1wi1:(11/1. Doo11grF111r1/l '"· c,;111111i,'-<ioncr of lnco.mefo:>: (').
In tho last ,.nsc, it was also point .. d out
tlmt the addition of the word" "prr•fits and gai11s"
in the phrno<' "income, profit8 ancl gains"' US('r] in
the Jnc:onw-tax Act clops not restrict the nwauing of
the word "inconw .. hy implieatinn, and that. -the
\1 hole exprt'ssinn is "inc-ome .. writ hnge.
But whatcY<'r "incom('" nrnv include or m<·an
it is lro\\"<'V<'r, dear that it 1!1 cs. not include fiX('<l
,.apital or the realising of fix(d Capital by turning
it into si.m•· "thcr· fur rn of capital ur mon .. y. Fixt'cl
1·apital iR somdhi11g •.d1i..J1 the owrwr kcq•s in hiH
possession hut. turns to profit; rirr:ulati11g l'apital
howcvrr, is turm·cl on·r in the process of profit
maki11g. It may so11wtim<'s hap1><·n that in the
process of production, fix<'d eapital may lit' "onsum<·rl or wasll'cl, hnt that is a n•duc-tiou of 1·apital
anrl not an <'X]JPnditurc in th<' !Jnsinc·ss dairnahk as
an allowam·(• in the reduction of nsscssahlc income
in the Hhape of profit8 of tll<' hu~iness.
The profit< of a businefR arc calculated un<ler
s.10 of the A«t. Cnder that section, taxi:; payable
(II [1932] L.R. 591 .. -\. 206.
(21 [1%2; I S.C.R. 257.
,
•
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,
'
3 S.C.R.
SUPREME COURT REPORTS
375
by a company under the he11d "profits an~ gains of
business ... " in respect oi tho profits or gams of any
business carried on by the company.
Ins. 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 \n the
nature of trade, commerce or manufacture. In all
cases where an assessee questions the finding that
asseRsable profits or gains have been made in a busi·
ness it is customary to find the assessee qurstioning 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 hits
raiaed three 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 rigl1ts, (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 exer0ised the second
right arnl 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 businees, if no business is done.
Lastly, it contcrnls th'lt even if the assesscc Company was carrying on busil1css, it was not carrying
on a trading activity but its aetivitics consisted in
merely collecting rents or royalties which taken with
the performance of otlwr necessary and allied activities could not amount to the carrying on of a
business resulting in incroased S11lam·i as profits
of the business.
No doubt, in Kamakshyri Narain Singh v.
Commissioner of lncome-t11x (') the Privy Council
(1) {1943) L.R. 70 I.A. 180.
1961
J.·aranpura
Devtlopment Co.,
Ltd.
y,
The CommiHioner
o.f lncomt·la\·,
H 'rst Bengal
llir/a_yatullah J,
1961
A·a•a11p?;r(I
Dttt!opn1111t Cf!.,
l.11/.
V.
'Tltr (~111111iJ (1011rr
r,_l buo111t·/a,,
ll'1J/ /11•1.~c[
11 ideJ_ratu!l ah ] .
3i6
SUPREME corRT REPORTS
[1962)
mac le a clist in<"tion between sums reel'ived as rovalt ics an cl Salami by the proprietor of 1 he Hamgarh
Est<itc holding the form<'r to be inc:ome from other
sonr<"rs within s. I:! nf the Aet, and the latt(•r as a
paymt>nt on eapit<d a1·c·o1mt; but. the facts Wl're
clifferent.
Since• th<' <'as" is relied upon by the
asses~<'<' Company, it i;; 11<.·ce,Hary to <·onsieler it in
KOinl' clt'tail.
The Comt nf "'arcls, aeti11g on bdialf
of th<' proprietor of Ramgarh Estate, gnmtccl l<'nse,;
for 99!l years tn eertain companiPs incluc\ing th.:
asscssel' Company. Unelc:r thl' terms of tlw leases tlw
less<'<'S agrcee\ to pa~· to t.he lc"ors rnya ltil'S at <'Crtain
ratl's pN ton of elifferent kincls of co;d raisecl and a
fix:ee\ R<1/mni or premium, the rnyalt,v b"ing snbjeC't
ah1·avs to a minimum annual snm.
lt mrn e·ontcne!Pcl "on hPhalf of the propridor that none of the
snms was tax:1blc as i1wonw. The •·onti'ntion of the
propriPtnr with regard to the royalty per ton aJHl
the· minimum
royah.~· was not a('C'C]ltC"cl but with
rP"arcl to tlw sc;/ami it waH.
The .Jucli<·ial Commit·
,.,
tl'e ohsc·ryC'el :
"Tlw .wilw11i has \i(·c·n, rightly in tllf'ir
Lordships" opininn, t1·eatl'cl as a C"apital re<·Pipt.
It ia a single l"1ymt·nt maclc· for th" a"qniHition
of the right of the kssee;; to cnjo~· the b<'n<'fits
grantee\ to them by the lease. That gl'ncral
ril-(ht may pro1wrl.'·
\JC' regarded as a l'apital
asset, ancl th'l mmw~· paicl to pnrd1asc it may
propNly he h"kl to he a ymymcnt on C"apita I
<WCOl!nt."
In that rasl', the general right was, in effr<·t
solcl hy the proprietor n(tlw Estate>,
In his hamlH
as a la.n<lowncr, the coa.l llt'arinQ' lauds \\'C"re prnp<'rty
anti wheu h<' sol<l the right to the lt•RS<'<'8 to <'njoy
the llt'nl'fits, he sol<l his pr<>pl'rty but he "'"" not
diiing lmsinc·SR.
'l'lw propridnr partl'el with tlw
gencral right, lint in his hancls it \\·as I!OI the stork·
in-trade ni' anv husi1wss.
fn his hancls the lands or
the rights in. rcspert of thc·m wen• propr1ty, lint
that character clicl not nc·c·cssarily continue in the '
.-0 .. -
..
1
-
... -
.. .
•.
'
3 S.C.R.
SUPREME COURT REPORTS
377
hands of his lessees. If the lessees treated these
lands, so to speak, as the stock-in-trade of their
business and turned them to
account at a
profit, the profit so gained may legitimately be
considered
as the
profit of
business. It is
contended that there is no difference between a
landowner and a company which owns land or
leases in land, and reliance is placed upon the
case of Br:ilgownie Land Trust Ltd. v. Commissioner
of Inland Revenu.e ('). In that case, the owner of
an estate left his landed estate to the trustees
"with a direction to realise".
The trustees were
unable to dispose of the land on the market and
formed a tompany to deal in real property· to
which the estate was transferred in exchange of
shares allotted to the beneficiaries. The company
then acquired other
properties as well, and
received rents which were paid as dividends and
then sold the newly purchased property and parts
of the estate making a profit. It was held that
the profits from the sales were profits of a trade or
business.
The actual decision is against the assessce
Company, but what is relied upon is a passage in
the judgment of the Lord President (Clyde) in the
Court of Session (Scotland) at p. 692, where it is
observed:
"One is not, however, entitled to infer
from the circumstances that a company is
professedly formed with trading purposes in
view and for trading objects that
the
transactions in which it engages necessarily
constitute a trade or business ; because it
does not follow from the fact that it has
objects and powers such as I have indicated
that it actually uses .them for the purpose of
conducting the usual business of a company
trading in real estate."
(I) (1929) 14 T. C. 684.
1951
Kan•npura
D~vtlopnunl C1.,
Ltd.
v.
The Commissi1nu
of I ncomt-tax,
fYest Benzal
Hida;·atu!lah J.
lf'lf.il
1i.·ara11prJTu.
]J,;-rfopn1111.' r: •. ,
'"'·
v.
Tht Co111111;,,,;,.,:e•
•f /tuomr-t•r.
U'ttt Bn1:al
378
SUPRE!l!E COURT REPORTS
(1962)
ff the asscsscc Company mis not doing hu;;incss but
w11s mPr<'l.\· rc:dising the property which it had
<l(''lllired, this pas.';ag"
might have br<>n of some
use ; hnt, as wil 1 he
~hown later, there was more
tlv.in mrr0 realiHing of its propNty in the present
C'ase, t>nd
thP further ohsPrvations of the Lord
Pr"~irl011t apply, whir-h nm :
"Hut tlw prof,.,~sed object;; of a ('ompnny
are 11ot for that reason, to be left out of
aeP011nt; 011 tlw <'Ontmry, they mu8t be kept
in ,·icw when Pm1;.iell'!'ing the t rnnsact ions in
whi<'h the <"ompany is proY<>'l to have been
Pngag1>tl."
Rclianr<' is also place'tl upon C<'rtain ohsc·rvation•
of Lord \\'arrington of Clyft°c' in Fry ,.. Salisburv
llouu l:.•tr.fr.;, J,td. ('), wllt're it. was said :
".-\srnming the· nwmorandum of associn.-
ti"ll allows ii, and in this case it tltl']llCS·
tionabl~· rloPs, a cnmpa11y i;; just as cn.pablc
as an in<livielu;d of bring a larnlowncr aml
as s11"11
ell-riving n·n\8 am! profits
from
it8 land, without ·thPrc·by hc«nming a trader,
11ncl in
m~· opinion it is the nature of it-8
opt'ratic•ns, awl not itR own <">tp;ieity, which
must dderminc whether it is carrying on a
l raclt> or not.·:
\Vp nc<'el not pause to co11siti<'I" the far·ts in that
c;ise, bt•ca11R<' """ ,_hall
<i<~il with it in cl..tail
preRcntly ; hut it is dear c1•c11 from thi" passage
that tlw rl<'<'iding fa<'t.1w i-; nnt ownership of land
or l1·asps but th<' nature of tlw actidty of the
as8C'SSP<· and the· nattJJ'<' of tlw opcrntions in
r"l·ttion to tlH'm.
The· ohjt'cts of th<' i:ompany
m1rnt n.lso lw kqit in vi1·w to interpret th" aeti1·it.''·
As mi' obs<'rn·d !>1· Lord St..1wlale-, ~L 11. in '/'he
Commissi011rrs of /~1./1111d l!l'rr11ur: \'.
Thro l\orcan
S~wlimfe Ud. ('),
•
"[f you
Olll"<' get the indi1·iel11al ancl the
company sp~1Hling exactly on tlw same basis,
\I) [l9JO] A. C. 432.
(l\ (19211 12 T. C. 181.
..
t
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>·
--
'
/
•
3 S.C.R.
SUPREME COURT REPORTS
379
then there would be no difference between
them at all.
But the fact that the limited
company comes into existence in a different
way is a matter to be considered. An individual comes into existence for many purposes,
or . perhaps sometimes for none, whereas a
limited company comes into existence for
some particular purpose, and if it comes
into existence for thfl particular purpose of
carrying out a transaction by getting possession of concession and turning them to
account, then that is a matter to be considered when you come to decide whether doing
that is carrying on a business or not."
'l'he decision in this case must, therefore, turn upon
the objects for which the Company was formed,
and whether one of the objects of the Company
was to develop and sell leases and leaseholds with
an eye to making profit and what its activity was,
in relation to its objects.
Before, however, we
analyse the objects for which the assessee Company
was formed and scan its activities, it is instructive
to refer to two cases to which the learned AttorneyGcneral for the Department called our attention
and which have also formed the basis of the
decision of the High Court and the Tribunal.
The first is the well-known case of Californian
Copper Syndicate (Limited and Reduced) v. Harris(').
There, the assessee company was formed, inter al.ia,
with the following objects :
"(I) To acquire copper and other mines,
mining rights, metalliferous and auriferous
land, in California or elsewhere in the
United States of America, and any interest
therein, and in particular to acquire the
mines known as (here follow some names)
liituate in the county of.. .......................... ..
...... .. .. . . ,, ............................... ········· ...... .
(I) (190~) 5 T. C. 159.
196/
Karanpura
DeN!loPment Co.,
Ltd.
v.
Tll! Commissi9ner
of /ncome·tar,
fVt'st Ben.~al
Hiiayatu/iah ].
19CJ
Ka1anpura
Dtt·1/opmtrit Co.,
I.rd.
v.
Tiu Comminiontr
of lruon~-tax,
H'tJt B111gal
380
SUPRE:IIE COURT REPORTS
(1962]
(17) To sell, lease, charter or otherwise
dispose of absolutely or conditiomilly, or for
any limitecl intcr<'st, tho whole or any part of
the undertaking. property, rights, conceRsions
or privilt·g.•s of the Comp'.l.ny for surh considcrntion in ca.sh, shares or ot.herwise as the
Compa.ny may think fit ........................... ".
The Company acquired 480 acr<'S of copper-bearing
land for£. 2.J,000 <ind spent money on dc\·ek·pment..
Later, 80 acres of this land WC're sold to Fresnr,
Copper Company, Ltd., for £. 105,000 payabl<'
wholly in fully paid shares of the Fresno Copper
Company.
Later, the Company sold the remaining
400 acres for £. l!J:i,000
pa~·abls wholly in folly
paid shan·s of
Fresno Copper Compan.v.
Thi:
Fresno Company had .J00,000 shares of£. I each,
and of these, :i00,000 were allott<'d to the Company.
The Company made no profits :~ssessable t.o incomctax, am! the question
was whether the net gain
dorivcd
from
the sale
of the prop1,rty coulrl be
deemed to be profit.
The Company cont~nded that
this was only a conversion of one kind of capita I
into one of another kind. In thP Court of Ex,.hcquer
(Rcotland) Lord ,Justice Clerk <listinguisht•d b~tween
two kinds of cases-( a) where tho owrH·r of an
ordinary investment chooses to realise it, and
obtains a
greater price for it than he originally
aequircd it at ; ancl (b) when· thP a.et is done not
merely as a
rcaliRation
but in
what is trul.r thP
carrying on
or carrying out, of a Lusines~. HP
obsen·ed:
"There are many companies which in
thdr very incepliun are forruccl for such a
purpoR<', and in thl'se eases, it is not doubtful
that, when they make a gain by a realisatinn.
the gain they make is liable tn b0 aRscssecl fur
Incon1c ~ra.x.
1
'
The learned Lord .Justico observed that the line
might be difficult to <irnw and each case must I.Jc
_,.. .
• -
•
•
-..
•
•
3 S.C.R.
SUPREME COURT REPORTS
381
decided on its own facts and posed the question,
which is the question to ask here :
"ls the sum of gain that has been made a
mere enhancement of vi>lue by realising a
security, or it is a gain made in an ope.ation
of business in carrying out a scheme for
profit-making !"
·
The facts in the case were held to indicate a highly
speculative business, and it was said that the mode
of the actual procedure employed also indicated a
trading venture.
Lord
Trayner
also agreed,
observing that it was "a proper trading transaction"
and one which was not only within the power of
the company but also authorised by the Articles.
The next case is British South Africa Co. v.
Corn missioner of I ncorne-tax (' ). In that case, the
assessee was the British South Africa Co., which
was incorporated, inter alia, for carrying into effect
concessions and agrnements which had been made ·
by certain chiefs of South Africa and such other
concessions which the Company might acquire.
After acquiring such concessions and mining rights,
the Company
gave special grants to other
companies in return for fully paid shares and
annual payments over a fixed number of years. The
Income-tax authorities in Rhodesia treated these
sums as profits, and assessed to income-tax
the full par value of the shares. It was held that
the sums were not capital receipts but income from
business. The High Court of Rhodesia and the
Rhodesian Court of Appeal affirmed the view of
the Income-tax authorities. On appeal, the Privy
Council did not endorse the view of the Rhodesian
Courts on certain aspects of the case, with which
we are not here concerned, but went on to enquire
into
the nature of the receipts
in question.
Their Lordships in this connection endorsed the
view of Hudson, P. that the payments were income
derived from the business of turning to account
.
(I) [1946] 14 I. T. R. Supp. 17.
1961
.A"aranpura
'Development Co.,
Ltd.
v.
The Commissioner
of /ncome~tax,
West Bengal
Hidayatullah J.
/(1••11jJura
J)1i·tlopmtnt Co ..
J.1i.
v.
·r1u c._·nmi j_(iontr
•f fi:comt-/ar,
H 'nl B1ngn(
lliiaJ«tullah ].
382
SUPREME COURT REPORTS
[1962)
the Company's rights ll!Hler the concessions (lf
winning and dbposing of minerals by participating in the proceeds of tlw exploitation of fillch
rights by its li(:ensces and the income \rns, therefore, taxable as !wing the profits or gai1rn of 11,
trade or business. Their Lordships also helrl that
it was not material "that in d<:>aling with its mineral rights the Company has retained an interest
either by way of a possible n·v<:>rter of the property or by a shareholding in a c1Jmpany to which
it made a special grant."
The ease, of course, is one to which the warning often given that it is not desirable to rely upon
decisions
under different taxi11g statutes won Id
seem appli<·ablc; but in the judgment of the Priv_,.
Courn•il, it is ma<lc clear that the Rhodesian Act
was not different from the British law.
The <k<·i·
sion also re•ts, not upon the provisiow; of any
special enactment: but upon t.he more g<·ncral
consideration whether such rt>ccipts <·an })(' co11sidcrccl in a busine"s sense as belonginl,'. to capital
account or revenue and in what circumstan<·es.
These two c<Lses n.ml parti<'ularly the Cnlifornian Copper Sy11dimte wse (') cited by the learned Attorncv-Gcncral <lo <'Stablish that if a cJJmpany sold its. assctH as a p<Lrt of its busim•ss with
the objects for whieh the company was fonned,
the excess receipts O\'Cl' th<' expt·nses of acquisition can he regarded as profits or gains of th<' hm1iness.
The case of the Californuin Copper Syndiwte
Ltd.(') is so similar in facts aH to be almost dcci-
~ivP; but the assessee Company relies upon Tebmit
(Johore) Rubber Syndiwtr. Ltd. i-. Farmer (') as
laying down the principle which should govern
this case.
fo t.hat caHe, a company was formed
with the object of aequiring estates in the l\[alay
Peninsula and developing thPm by planting and
cultivating rubber trees.
The ;\l<•morandum of
(II (1904/ 5 T.C. 1~9.
(21 !1910• 5 T.C. 658.
,·
•
3 S.C.R.
SUPREME COURT REPORTS
383
Association contained a power to sell the property
in the following terms:
( 12) "To sell, or otherwise dispose of, as a
going concern or otherwise, the whole or any
part of the business undertaking and property of the Company for such consideration
as the Company shall think fit."
Two estates were purchased, hut for want of adequate capital were sold to another company iur
consideration in the shape mainly of shares in tho
second company. The return thus exceeded the
amount of capital expended in making the acquisitions.
Before the sale, however, a considerable
part of the estates had been planted with rubber
trees hut no rubber had been produced mul the
first company had not reached the production stage.
The Company had thus not earned any income
except what it got by the sale.
This was claimed
to he an increase of capital. The Surveyor of Taxes relied, inter alia, upon the Californian Copper
Syndicate case (1). It was held by the Court of
Exchequer (Scotland) that the profit on sale
1\·,~s
merely an appreciation of capital and not profit
assessable to income-tax. Lord Salves'l.n observed
that he was unable to distinguish the position of
the company from that of a person who acquired
property by way of investment and who realised
it afterwards at a profit.
He, however, observed:
"No doubt if it is a part of his business
to deal in land or investments, any profits
which in the course of that business he realises form part of his income; but the mere
fact that a person or company has invested
funds in the purchase of an estate which has
subsequently appreciated and so has realised
a profit on his purchase does not make that
profit liable to assessment."
The Californian Copper
Syndimte mse (') was
(1) (1904) 5 T.C. 159.
1961
h"aran;urg
lJe1·el,,pme11t c •. ,
Lti.
v.
'[he Commissi1nl!r
nf /t/ccme-tax,
TVest Ben~al
J-Iida_r«tidlah J·
Karanp111a
Dtrtlopmtnl Co.,
Lid.
v.
1-h,
CommiJ~iont'f
of lncomt-l'l.\,
H"tsl Br11ga/,
/{ida;·alu//ah J.
384
SUPRE'.IIE COUH.T REPORTS
[1962)
clistinguishcd, because in th;it case, Lori! Trayuer
harl founcl that lmsiness was being done, and the
following obsrrnttion, from Lord Tranrnr's .Judg.
ment were <'mphasisC'd:
'
"lam s11tisfi<'d that the Appellant eom·
pany was formed in order to aequire certain
mineral fields or workings--not to work the
same themselves, for the ben('fit. of the Company, but sol .. Jy with the view and purpose of
n·selling the same at a profit."
Loni Salv1,sen pointed out that snch an inference
._
coul<I not lie drawn abont th0 case before him.
Thfs1• two Sl'tS of cases illustrate forcrfolly
the changing circumstances in which an excess rein·
m may 1; .. treated as an appreciation of r·apital
or as profit. If tho sale is after a company is
wound up and busin0ss has stopped, it may (,;nbje<'t
to special st.a tu t.ory provisions) be said that an.v
excess amount rPcein·d on·r and above the capital
of the company is merely an appreciation of capital;
but the same 1'a1mot be &tid if busill('8S is being
<lono in lan<ls, mi1wr1t.l conc<'ssion:<, mining rights
with It. vi<'w to making profitH.
In tho latter case,
a Rale at an cnh1t.11eed price is not.appreciation or
capital but profit in the way of lmsincss, and the
gale iH, so to Rp<,ak, of stock-in-tra<le.
Mr • .Mitra relies upon three cas1'" to establish
that no business at all was being done. He contends that the assessec Compan.v was merely grnnting
sub-leases of property of which they had the reverter and all that the a:;sessee Company did was to
collect rent and royalties.
Before dc;tling with the
cases, it is neces~:try to point out that the ultimate
reverter has no significance.
Th,, term is 999 yeare
less a few thys. E,·.,n if it wa..~ shorter, a possible
reverter is not material. Tho observations of the
Judicial Committee in the cas1• from Rho<lesia quoted oar lior have our assent.
·•
'
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h
,
,
3 S.C.R.
SUPREME COURT REPORTS
385
The first case relied upon is
En~t India Prospecting Syndicate v. Commi&sioner of Excess Profit
Tnx(1). In that case, the facts were very different. In
1919, V.C., a limited Company, obtained a prospecting licence from the Raja of Talchar in respect of
some 8 sq. miles of coal-bearing lands. On August
5, 1920 a partnership was formed which was namt>d
the East India Prospecting Syndicate. The objects
of the partnership were:
(1) to purchase from the Company their
rights under the prospecting licence;
(2) to give effect to the conditions of the
said licence ; and
(3) to promote a company or companies
with limited liability for the purpose of acquiring at a profit to the Syndicate a.]] or any of
the properties including the benefit of the
prospecting licence.
The Syndicate acquired the prospecting licence
from the Company, V.C. In 1921, the Syndicate
obtained
a mining lease from
the Raja of
Talchar over about 500 acres for 30 years with
option to renew.
The Syndicate then promoted a
Company called the Talchar Coalfield Ltd., (shortly T.C.) and sub-let the mining property to it.
Tl}ey received payment in cash, in the shape of
shares in T.C. and certain amounts periodically
which were in excess of the amounts payable for
a like period to the Raja of Talchar. The contention of the Syndicate was that they were not
carrying on any business. It was held that the
activities of the Syndicate did not amount to a
business and their receipts could not be regarded
as profits of business and were not chargeable to
excess profits tax. It was conceded by the Department in that case that the functions of the Syndicate, which was a partnership, and neither a limited
Company nor an incorporated society, consisted
(1) [1951] 19 I.T.R. 571.
1961
K4ranpura
Development Co.,
Ltd.
v.
The Commissiontr
of Income~tax,
JVest Bengtil
Hidayatullnh J.
l:.llil
lilu•11p111c
l)trt/cf>nunt C•1.,
ltd.
v.
'/ht
C.111mi,J1C.'-Cf
"{ huo?I( tar,
· 1rcs1 8111,:;al
386
SUPREME COURT REPOHTS
[ lfJG2 J
wholly in the holding of propC'rty, allll th11t
thcv had no other f11nc;tions whatsol'vcr.
It waH,
th\';·cfurP, lwid:that tht• proviso to s. :!(ii} of the
Excess Profits Tax Act, which ddinccl Lusi1wss i11
certai11
c·ircurnstanl'e~, was 11ot applimblc,
that
proY iso r!'ad:
"Prodded that where the fu11eticJ11s of a
c·ompany Gr of a oucicty incorporated by or
11nd<·r any e11ao:tment consist wholly or mainly
in lhc holding of i11vestmc11ts or other proper.
ty, the· holding of the i1l\'CStrncnts or propc·r·
ty sh~ll lie de.,mcd for the purpo~c of this
ckfinition lo be a busim•s; carried on by HUCh
. t
"
company or soCH' y.
Harries, C.J., anrl Chatterjee, J ., h<'kl that, on the
prinei pie exprrssio
un ius e.rclitsiu
nllerius, the
fiction in tho pro\·iso was not applicahlc to indi,·iclualH and other Lodics.
It was, however, pointed
out that:
"ff this rnb-lca>ic had been granted by a
limited company or by an incorporatecl soeiety
the net profit could be rcgarclccl as profits for
the purp08l'S of Excess Profits Tax Act hy
reason of the proviso to Section 2(:"i) of tho
Act."
The case was thus decided on the words of s. 2(5)
of tha Excess Profits Tax Aet and the fact that the
Syndicate was a partnership. The High Court then
went on to consider t.he nature of rents and rovalties received by the Syudicat{J, and held on' the
authority of In re Commerr-Wl l'ropcrtie.s Ltd.(')
that for income-tax purposes the income would fall
to be considered under s. !) and not s. IO.
It will he noticecl that there was hut one
property which the Syndicate held and the whole
of that property was suL-let to 'P. C. Before it was
..
-.
so sub-let, it was not being usocl for auy business
•-
and all that the Syndicate did with it was to lea.so
(I) (1928) l.L.R. 55 Cal. 10$7 •
•
-
.. -
'
3 S.C.R.
SUPREME COURT REPORTS
387
it out. It was, in these l'ircumstances, that it was
held to yield income from property and not profits
or gains from business.
The case is analogous
to In re Comrnercial Properties Ltd. (1), which is
also cited by the assessec Company. There, th€
object of the registered company was to acquire
land, build houses and let premises to tenants in
Calcutta and elsewhere. The sole assets were three
properties which were let out and all that the
registered company did was the management and
collection of rents. Rankin, C. J., held that the
receipts were income from property within s. 9 of
the Income-Tax Act, that letting out such property
and collecting rents was not doing business, and
that profits and gains from business were very
different from income from property. These two
cases were decided on their very special facts. The
first was a case of excess profits tax, and the fiction
created by s. 2( 5) of the Excess Profits Tax Act not
being applicable, the nature of the' business, if any,
was examined, and it was held that there was no
more than collection of rents from property.