1958 (9) TMI 102 - HC - Income Tax

Selami receipts from subleases deemed taxable under Income-tax Act for profit-making activities

KARANPURA DEVELOPMENT CO. LTD. Versus COMMISSIONER OF INCOME-TAX, WEST BENGAL

KARANPURA DEVELOPMENT CO. LTD. Versus COMMISSIONER OF INCOME-TAX, WEST BENGAL - [1960] 38 ITR 484 (Cal) Issues Involved:1. Whether the sums received by the assessee company as selami for granting subleases of coal-mining leases were trading receipts.2. Whether the profit contained in the selami receipts was assessable under the Indian Income-tax Act.Detailed Analysis:Issue 1: Nature of Selami ReceiptsThe primary issue was whether the sums received by the assessee company as selami for granting subleases of coal-mining leases were trading receipts in the hands of the company. The court examined the history and activities of the assessee company, which was formed to exploit a prospecting licence by obtaining coal-mining leases and subletting them at a profit. The company was incorporated with the primary objective of acquiring and managing coal-mining rights, as outlined in its memorandum of association. The company engaged in continuous prospecting operations, developed coal fields upon discovering coal, obtained necessary head-leases, and sublet these leases to other companies for actual mining operations, thereby making a profit. The court concluded that these activities constituted a business. The court referred to several precedents, such as the case of Commissioners of Inland Revenue v. Korean Syndicate Ltd., where it was held that a company formed for acquiring and working concessions and turning them to account was carrying on a business. Similarly, in Inland Revenue Commissioners v. Westleigh Estates Co. Ltd., a company administering an estate and deriving revenue from leases was held to be carrying on a business. The court thus held that the assessee company was carrying on business operations and that the selami receipts were trading receipts.Issue 2: Assessability of Profit under the Indian Income-tax ActThe second issue was whether the profit contained in the selami receipts was assessable under the Indian Income-tax Act. The court noted that the assessee company had admitted that the royalties received from sublessees were business receipts and taxable. The court reasoned that if the royalties were business receipts, the selami amounts arising from the same transactions must also be business receipts. The court emphasized that the activities of the assessee company, which included prospecting, developing coal fields, obtaining mining leases, and subletting them, constituted a business. Therefore, the selami receipts, being part of these business activities, were also assessable under the Indian Income-tax Act. The court referred to the case of Lakshminarayan Ram Gopal and Son Ltd. v. The Government of Hyderabad, where the Supreme Court of India approved the principles laid down in English cases, emphasizing that the activities of a company formed for a business purpose constitute a business if pursued with the intent of making a profit.Conclusion:The court answered the question in the affirmative, holding that the sums received as selami by the assessee for granting subleases were trading receipts in its hands and the amount of profit therein was assessable under the Indian Income-tax Act. The Commissioner of Income-tax was awarded the costs of the reference.