1961 (8) TMI 7 - SC - Income Tax

Salami received from sub-leases taxable as business profits under Income-tax Act

Karanpura Development Company Limited Versus Commissioner Of Income-Tax, West Bengal

The Supreme Court upheld the High Court's decision that the sums received as salami by the assessee for granting sub-leases were trading receipts ... 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 the assessee-company? Held that:- The relevant clauses of the memorandum of association of the assessee-company show that the various objects for which the assessee-company was incorporated. It is clear from these operations that the assessee-company having secured a large tract of coal-bearing land parcelled and developed it into a kind of stock-in-trade to be profitably dealt with. The assessee-company extended its business along these lines acquiring fresh fields. In the circumstances, the nature of the business was trading within the objects of the company and not enjoyment of property as landowner. There was also no sale of its fixed capital at a profit. In our opinion, the High Court rightly answered the question against the assessee-company. Appeal dismissed. Issues Involved:1. Whether the sums received as salami by the assessee for granting sub-leases were trading receipts and assessable under the Indian Income-tax Act.2. Whether the activities of the assessee-company amounted to carrying on a business within its memorandum of association.3. Whether the increased salami received from sub-lessees represented profits of that business liable to be included in the assessable income for income-tax purposes and in the profits for purposes of the business profits tax.Issue-wise Detailed Analysis:1. Trading Receipts and Assessability under Indian Income-tax Act:The primary issue was whether the sums received as salami by the assessee for granting sub-leases were trading receipts and assessable under the Indian Income-tax Act. The High Court of Calcutta had answered this question in the affirmative, against the assessee-company. The Supreme Court upheld this decision, noting that the sums received as salami were indeed trading receipts and thus assessable under the Income-tax Act.2. Carrying on a Business within Memorandum of Association:The Tribunal and the High Court held that in acquiring the head leases and granting the sub-leases, the assessee-company was carrying on a business within its memorandum of association. The assessee-company argued that it was merely holding its capital asset and managing lease-hold rights, which did not amount to carrying on a business. However, the Supreme Court found that the company's activities-acquiring head leases, developing coal fields, and granting sub-leases-constituted carrying on a business. The court emphasized that these activities were within the company's objects as stated in its memorandum of association.3. Increased Salami as Profits of Business:The assessee-company contended that the increased salami received from sub-lessees was a capital return and not assessable as income. The company argued that it was merely realizing its capital by transferring general rights under the leases, similar to a landowner collecting rents. However, the Supreme Court rejected this argument, distinguishing the case from Kamakshya Narain Singh v. Commissioner of Income-tax, where the salami was considered a capital receipt. The court noted that the assessee-company's activities were not merely holding and managing property but actively developing and leasing out coal fields as part of its business operations. Thus, the increased salami was considered profits of the business and assessable as income.Conclusion:The Supreme Court concluded that the assessee-company was indeed carrying on a business within its memorandum of association and that the increased salami received from sub-lessees represented profits of that business. Consequently, these sums were liable to be included in the assessable income for income-tax purposes and in the profits for purposes of the business profits tax. The appeals were dismissed with costs.