TaxTMI 
TaxTMI 
TaxTMI 
1986 (7) TMI 8
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....including certain business operations. These operations were carried out in India and abroad and used to be carried out, inter 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 Government of Burma. In the year of account ending on May 31, 1950, the assessee-company 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 specimen copy dated October 28, 1925, which was taken into consideration by the High Court. It may be mentioned, however, that the forest leases were for a duration of 15 years and in respect of large areas. Under these leases, the assessee-company was authorised to fell the teak trees and convert them into 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....
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....leases had already been terminated. The agreement provided for making over by the assessee-company 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 of all the assets pertaining to the forest leases, viz., headquarters, elephants, cattle, stores, buildings, dwelling 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 to the assessee-company of 50,000 tons of teak logs of specified qualities mentioned in clause 7 of the said agreement. 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 I 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 : (1) 28,847 tons against non-....
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....65,52,153 in the accounting year ending May 31, 1950, and Rs. 5,78,896 in the accounting year ending May 31, 1951, was exempt from tax as being receipts of capital nature as contended by the assessee-company. Similarly, the further question which arose was as to whether the sale proceeds amounting to Rs. 31,980 in the accounting year ending May 31, 1950, and Rs. 2,69,975 in the accounting year ending May 31, 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-company 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 sterilised 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 assessee-company that the assessee's business had not stopped and t....
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.... " II. Assessment year 1951-52 1. ......... 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 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, respectively, were liable to tax under the Act ? " Similarly for the assessment year 1953-54, the questions referred by the Tribunal to the High Court were as follows ([1971] 81 ITR 777, 805): " 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, question No. 2 in the affirmati....
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.... that clause need not be set out. Clause 4(1) was as follows: "4. Period during which agreement is in force.-(1)This Agreement shall come into force on the 1st day of January, 1926, and shall unless previously terminated under clause 26 or clause 29 terminate after the expiry of a period of fifteen years, viz., on the 31st day of December, 1940: Provided that in respect of the rights conferred by clause 27 or by sub-clause (2) of this clause and in respect of every 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: "19. General responsibilities of Contractor.-Nothing herein contained shall be deemed to relieve the Contractor, his agents and servants of the duty of complying with any Act of the Legislature and of the rules thereunder at the time being in force a....
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....r 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 right to terminate the agreement at any time by giving two years' notice in writing. On January 1, 1926, there was commencement of the agreement. December 31, 1940, was the due date of expiry of the agreement. On April 7, 1942, there was extension by the Government of Burma of the long term agreement till such time as it became possible to resume forest operations and for such further period as might be required for settlement of new agreements. On January 24, 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 five contractors on the one hand and the Government of Burma on the other hand for exploitation of forests. On February 4, 1948, there was the assessee's letter to the Government of Burma indicating their specific rights under the Forest Agreement in respect of logs in the course of extraction on termination of agreements. On February 10, 1948, the Burmese Government replied to the assessee's letter dated Februar....
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....f the 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 stock-in-trade and the assessee was not a purchaser of any stock-in-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 premises 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. The main concern of the Government was only to charge royalty before the logs, whereof extraction was completed, were removed by the assessee from the contract area. It is of importance that the right of extraction and/or to fell, convert and remove that....
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....assessee-company's main income was from felling the trees and it carried on the said business on an extensive scale. 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 the statement of the case. Mr. Kaka further reiterated that the leases were for a long duration with a first right of refusal to any subsequent leases. Reference was made in this connection to clause 4(2) of the lease agreement appearing at page 30 of paper book. The forest leases, it was 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 busines....
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....and logged and removed the felled trees. The assessee was prevented from carrying on this business upon the nationalisation of the forest resources and the consequential acquisition of the residuary rights and assets pertaining to the forest leases belonging to the assessee. Mr. Kaka urged that compensation therefore, paid for acquisition of the residuary rights and assets was for the sterilisation of the company's business and, therefore, a capital receipt. He relied on the observations of Lord Buckmaster at page 463 and Lord Wrenbury at page 465 in Glenboig Union Fireclay Co. Ltd. v. IRC [1922] 12 TC 427 (HL). It was further urged that once it was held that the forest leases constituted the capital assets of the assessee, compensation paid for the sterilisation of even a part of a capital asset must be regarded as a capital receipt. Furthermore, according to him, it made no difference whether there was a sale of an asset out and out or it was a means of preventing the acquisition of profits that would otherwise be gained. He urged that in either case the asset of the company was sterilised or destroyed. Reliance was placed on the observations of this court in CIT v. Vazir Sultan ....
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....airam Doongarmall v. CIT [1961] 42 ITR 392, 406, this Court observed as follows after discussing several authorities : " All these cases were decided again on their special facts. Though they involved examination of other decisions in search for the true principles, it cannot be said that they resulted in the discovery of any principle of universal application. To summarise them., South India Pictures' case [1956] 29 ITR 910 was so decided because the money received was held to be in lieu of commission which would have been earned by the business which was still going, and the receipt was treated as the fruit of the business. The same reason was given in Jairam Valji's case (1959] 35 ITR 148 and the Shamsher Printing Press' case [1960] 39 ITR 90. In Vazir Sultan's case [1959] 36 ITR 175, the compensation was held to replace loss of capital and in Godrej's case [1959] 37 ITR 381, the compensation was said not to have any relation to the likely income or profits but to loss of capital. Each case was thus decided on its facts. We have so far shown the true ratio of each case cited before us and have tried to demonstrate that these cases do no more than stimulate the mind, but none c....
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....ords in Van den Berghs Ltd. v. Clark (H.M. Inspector of Taxes) [1935] 3 ITR (Eng Cas) 17. In that case, a Dutch company and the assessee, who were competitors in the manufacture and dealing in margarine, in order to end the competition, entered into an agreement in 1908, by which they bound themselves to work in friendly alliance and to share their profits and losses in accordance with an elaborate scheme therein specified; further, it was stated that they would promote the commercial, pecuniary, buying and selling and other interests of the two companies. In 1913, another agreement was entered into modifying the original basis of ascertaining and sharing profits, and, subject thereto, continued in force the provisions of the agreement of 1908 until December, 1940. During the war, the agreements were not operated, but in 1920, a third agreement was made modifying the two previous agreements as to the basis of profit-sharing, extending the branches of the business, and again continuing the principal agreement of 1908 till December, 1940. In 1927, three agreements were made, under which the appellants agreed to determine the agreements of 1908, 1913 and 1920 in consideration of the p....
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....trader's activities could be regarded as an income disbursement or an income receipt. Lord Macmillan noted that the legal character of the payment should not be misjudged by the magnitude of payment for " magnitude " is a relative term. But the magnitude of transaction is not an entirely irrelevant consideration. With respect, we accept this approach of Lord Macmillan to the facts of the present case before us, which appears to be basically similar. The forest leases, therefore, constituted in our opinion, capital assets of the assessee. The same conclusion is fortified by the observations of the House of Lords in the case of Hood Barrs v. IRC (No. 2) [1957] 37 TC 188 . In CIT v. Vazir Sultan & Sons [1959] 36 ITR 175, this court held that in considering whether compensation paid to an agent on the cancellation of his agency was a capital receipt or a revenue receipt, the first question to be considered was whether the agency agreement in question was a capital asset of the assessee's business and constituted its profit-making apparatus and was in the nature of its fixed capital, or it was a trading asset or circulating capital or stock-in-trade of its business. If it was the form....
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....22. The question accordingly was rightly decided in favour of the assessee. Regarding question No. 4 in the assessment year 1950-51 and question No. 3 in the assessment year 1951-52, these related to the delivery of 2,946 and 12,067 tons of logs to the assessee-company in respect of the depreciable assets, stores and livestock mentioned in sub-clause (b) of clause I of the agreement dated June 10, 1949. The High Court was right in holding that the logs came into the possession of the assessee-company in consequence of the agreement made on June 10, 1949, against the delivery of all outstanding or residuary rights of the assets to the Government. The arrangement was in consequence of nationalisation of forest operations in Burma. The whole of the quantity of 43,860 tons of logs delivered to the assessee-company was in lieu of the assets of the forest leases and other diverse assets which were handed over by the assessee-company to the Government on June 10, 1949. These logs were not received by the assessee-company on revenue account at all. The fact 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 is a....