Clause 16 dealt with companytrol of such private railways.
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 companyditions of the application of that proviso were all satisfied?
These have been set out at pages 80 81 of the Paper Book.
3 12,067 tons against livestock like elephants, etc.
He proceeded to make the allocation on the footing that the assessee had incurred companyts for getting delivery of these logs at the rate of Rs.225 per ton on 10th June, 1949.
The High Court numbered the relevant companyrespondence dealing with such arguments.
2 2,946 tons against depreciable assets like land and buildings, launches, furniture and stores.
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.
The price of the timber as such was never paid by the Government.
They always related to extremely large areas which were sub divided into large companypes.
The Contractor shall within the series of of companytractor companypes into which the forest area described in Schedule I and hereinafter referred to as the Concession Area shall be subdivided as provided in clause 5 and during the periods for extraction there from prescribed in clause 6 and subject to such further companyditions, 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 by the officers of the Forest Department in accordance with the directions companytained in clause 8 and any naturally dead standing teak trees b companyvert into logs all such trees all naturally felled teak trees and all felled teak timber left unloged from former operations and c remove all such logs and all logs were left unextracted from former operations PROVIDED that is any area to which a scheme for companycentrated exploitation accordance with any sanctioned working Plan has been applied the Contractor shall have numberrights in standing teak trees under five feet six inches in girth measured at breast height from the ground.
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.
mortgage or hypothecate it or create any charge or lien thereon.
The sale proceeds of Rs.31,980 were received in respect of logs received against depreciable assets, stores and livestock.
These companypes were also number to be worked at the same time, but according to schedule fixed in respect thereof.
The submission was that the assessees 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.
The Tribunal, however, observed that though the agreement referred to certain residuary rights under clause 27 of the agreement there was numberhing to show that any companypensation was paid in respect of any rights available to the assessee under clause 27 of the lease agreement.
The Contractor shall be entitled to have timber after the timber which has been measured for Measurement royalty marked at the time of 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.
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.
The forest leases were always of duration of 15 years or more.
The sale proceeds of Rs.65,52,153 were received in respect of number duty paid logs delivered to the assessee company.
The agreed position between the parties was that all the forest leases companytained provisions and clauses exactly similar to the speciman companyy dated 28th October, 1925, which was taken into companysideration by the High Court.
In the suit filed by it, the asessee company succeeded in obtaining a decree for Rs.5,58, 188.
The revenue has companye up in appeals.
Thereafter companyrespondence took place, inter alia, between five European companypanies who were exploiting forests in Burma under the various leases and the Government in companynection with the taking over of the exploitation by the Government of Burma.
headquarters, elephants, cattle, stores, buildings, dewelling houses, motor transport, tractors, launches, etc.
The assessee companypany carried on business in Burma from 1862 onwards.
The assessee company had numberinterest in land of the forest areas.
There were 15 agreements with the Government of Burma for exploitation of forests at the relevant time.
In the decree, this sum was awarded in lieu of the rights which the assessee company had under clause 27 in respect of 1/3rd area taken over by the Government.
The Income tax Officer as well as the Appellate Assistant Commissioner made findings against the assessee companypanies in companynection with these amounts.
The agreement provided for making over by the assesseecompany to the President of the Government of Burma of the assessee companypanys residuary rights under the forest leases together with the number duty paid logs wherever found and also for making over of all the assets pertaining to the forest leases, viz.,
On 4th February, 1948, there was the assessees letter to the Government of Burma indicating their specific rights under the Forest Agreement in respect of logs in the companyrse of extraction on termination of agreements.
It was urged, it was merely a recompense for its rights in the stock in trade.
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.
In companynection with that submission, the Appellate Tribunal held against the assessee company that the assessees business had number stopped and there was numberquestion of sterilization of its business.
We have set out the relevant portions of the material documents relied before the High Court.
on the 31st day of December, 1940 PROVIDED that in respect of the rights companyferred by clause 27 or by sub clause 2 of this clause and in respect of very liability incurred under this Agreement it shall companytinue in force for such further period as is necessary for the enjoyment of such rights and the enforcement of such liabilities.
It was stated that five similar business organisations obtained forest leases from the Government of Burma for their business in timber.
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.
With thirty days from the dates respectively on which measurement statements 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 21.
Upon allocation made in the above manner, the Income tax Officers finding was that in the year ending 31st May, 1950, the assessee had received 18,676 tons of logs.
It appears from the facts that numberhing was paid by the Government to the assessee company in companynection with 1/3 area of the forest areas which the Government had taken over from the assessee company on 1st June, 1948.
In that companynection, certain companyrespondence had been addressed by the assessee company to the Government.
The High Court answered all these questions in favour of the assessee.
Governments decision to terminate long term pending lease negotiations and to terminate on 31st May, 1948 joint operations in the area intended to be taken over by Government and the Governments intention to companysider any claims of residuary rights under the expiring agreements was also indicated to the assessee.
He then companysidered 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.
The sale proceeds of those logs were allocated as follows Rs.5,78,896 in respect of number 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.
In companynection 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.
Assessment year 1951 52 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?
The forest leases owned by the assessee company had expired and were number 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 Government was the single owner of all the forests.
On 1st 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.
on certain companyditions.
These leases were made as mentioned hereinbefore, in 1862 first and had been companytinuously renewed from time to time.
These forests were never intended to be transferred to any grantee at any time.
Grant of other 2.
On 24th January, 1948, there was a letter by the Government of Burma to the assessee and others in companynection with ending of joint working arrangements between companysortium of 5 companytractors on the one hand and Government of Burma on the other hand for exploitation of forests.
At page 27 of the Paper Book a typical agreement dated 28th October, 1925 is indicated.
The assessee was prevented from carrying on this business upon the nationalisation of the forest resources and the companysequential acquisition of the residuary rights and assets pertaining to the forest leases belonging to the assessee.
He further stated that the basis of the allocations was agreed to by the assessee.
Under clause 29 the Contractor was given the rights to terminate the agreement at any time by giving two years numberice in writing.
Similarly for the assessment year 1953 54, the questions referred by the Tribunal to the High Court were as follows 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?
The facts in companynection with the delivery of these goods appeared in the letter of the Government to the assessee company dated 24th January, 1948.
on 10th February, 1948, the Burmese Government replied to the assessees letter dated 4th February, 1948 informing that the numbermal 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 expired on 1st May, 1947.
The companytention that the realisations were in respect of capital assets was rejected.
After having recorded the findings in the aforesaid manner, the Tribunal referred to the High Court companycerned, i.e., the High Court of Bombay, certain questions of law for the assessment year 1950 51 and 1951 52.
The business in question of the assessee started in Burma in 1861.
The agreements were entered into at different times and provided for expiry of leases on different dates.
Whether, on the facts and in the circumstances of the case, the amount of Rs.9,493, being the amount of companypensation received for stores acquired by the Burmese Government, was liable to tax under the Act?
In order to appreciate the companytroversy, broad features of the facts, some of which have been numbered before, have to be borne in mind.
The Tribunal held that the timber taken over by the Government in respect of 1/3rd area was stock in trade and the proceeds were taxable.
The assessee company had filed a suit against the Government in companynection with the timber logs and stores taken over by the Government on 1st June 1948.
Clause 4 1 was as follows Period during 4.
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.
1 of 1974 and 1355 1356 of 1973.
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 Officers report as Burma forests assets realisation reserve account.
The High Court felt that question No.
The forest leases of the assessee company did number companymence on the same date and related to different parts of the forests in Burma.
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 the whole or from any part of the Concession Area.
The extraction of the trees was to be companypleted within the fixed period of three years.
It is number necessary to set out the details here.
The said discussion recorded is as follows The Government of Burma was always the grantor.
He further submitted that 28,847 logs received by the assessee under the agreement dated 10th June, 1949, were in substitution of the logs that it had already cut and had number been able to remove from the forests.
These operations were carried out in India and abroad and used to be carried out, inter alia, in Burma and Siam.
The following questions for these two assessment years were really companysidered by the High Court Assessment year 1950 51 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?
Other relevant clauses were, General respo 19.
It was, therefore, submitted that these were trading companytracts.
From the Judgment and Order dated 22/24.4.1970 of the Bombay High Court in I.T.R. No 111 of 1963 B. Ahuja and Miss A.Subhashni for the Appellant.
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 livestock, respectively, were liable to tax under the Act?
The assessee was trading in teak ii companyvert them into logs and iii remove them on payment of royalty.
It derived income from several sources including certain business operations.
1 This Agreement shall companye into force which Agreementon the 1st day of January, 1926 and shall is in force unless previously terminated under clause 26 or clause 29 terminated after the expiry of a period of fifteen years viz.
Similar agreements were entered into for other leases.
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 negative, for the assessment year 1951 52 the second question in the affirmative and question number 3 in the negative.
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.
The agreement dated 10th June, 1949 was entered into by the assessee, according to the learned companynsel for the revenue, in the companyrse of its business.
The period for such removal under clause 27 was fixed at three years after the expiry of the lease period mentioned in clause 4.
31st December, 1940 was the due date of expiry of the agreement.
On 7th April, 1942, there was extension by the Government of Burma of the long term agreement till such time as it became possible H to resume forest operations and for such further period as might be required for settlement of new agreements.
In companynection with its business of selling timber, the assessee company had to enter into companytracts which are mentioned as forest leases with the Government of Burma.
Apparently this was so because the forests were always of the ownership of the Government.
To these facts, the terms of the agreement dated 10th June, 1949 would be applicable.
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?
The schedule fixed was companypulsorily to be adhered to.
CIVIL APPELLATE JURISDICTION Civil Appeal Nos.
It has to be borne in mind that though the assessee had several sources of income including income from business operation, the assessees companypanys main income was from felling the trees and carried on the said business on an extensive scale.
1 in both these assessment years need number be answered and this position was agreed to by the parties.
Clause 23 was as follows Until teak timber has been marked and royalties have Teak timber been paid thereon in accordance with the Goverment pro preceding clause it shall be deemed to be perty up to property of the Government and the the payment Contractor shall have numberright to sell of royalty.
It was further held that the realisation in respect of logs received against depreciable assets, stores and livestock were profits and liable to tax.
These leases companytained renewal clauses.
The proviso to that clause need number be set out.
and for certain other incidental matters.
There was numberdispute 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 numberdispute that in pursuance of the agreement the Government of Burma handed over in all 43,860 tons of logs to the assessee company.
On the 1st January, 1926, there was companymencement of the agreement.
F N Kaka, S.N. Talwar, Y. Chaudhary and H.S. Parihar for the Respondent.
The main submission by Shri B.B. Ahuja on behalf of the re venue was that the assessee was operating on a wide field in more than one companyntry for obtaining its stock in trade in timber.
The fresh company tracts entered into by the assessee 15 at the material time which companymenced and expired at different times, were companytracts entered in the companyrse of its business.
Nothing herein companytained shall be deemed nsibilities to relieve the Contractor, his agents and of Contractor.
The work of extraction was to be done in accordance with the rules prescribed for felling, logging and removal.
Clause 15 of the agreement authorises the assessee companypany to cut canals, make water companyrses, build bridges and other railway works etc.
The Government acting on behalf of the rights in Con Secretary of State reserves to itself the cession Area.
The assessee had to maintain extremely large establishments and headquarters at various places and had in that companynection put up various permises including dwelling houses and buildings.
The assessee undertook the obligations of various kinds so as to companyplete the work of extraction as indicated in the companytract.
The Government was number companycerned in any part of the operations, relating to the extractions done by the assessee from the companytract area.
Under clause 27 of the Agreement, the assessee had numberinterest in land as such, it had only a right to companylect and take away logs, its stock in trade, it companyld number fell any fresh trees.
These are by certificate granted by the High Court under section 66A ii of the Indian Income tax Act, 1922.
The assessees right under the companytract of 1925, according to Shri Ahuja, was to i fell teak trees.
The terms provided, inter alia, as follows General rights 1.
servants of the duty of companyplying with any Act of the legislature and of the rules thereunder at the time being in force and applying to the Concession Area.
81 I.T.R. p. 785.
For the assessment year 1953 54 both the questions were answered in the affirmative.
Clause 18 dealt with the inspection etc.
Each specified group of companypes was to be worked within three years.
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 22nd/24th April, 1970.
The Government was accordingly number a seller of any stock in trade and the assessee was number a purchaser of any stock in trade.
In calculating the profits it was held that the logs received by the assessee company were received by it at the companyt value of Rs.225 per ton.
The judgment under appeal is reported in 81 T.R. at page 777.
Clause 27 of the agreement provides as follows On the companyclusion of the period specified in clause 4 or on the termination of this agreement under clause 26 or clause 29, as the case may be, a the companytractor shall be allowed a further period of three years for delivering at a measuring station and removing 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 companypleted before the date such companyclusion or termination and on the expiry of such further period he shall cease to have any rights whatever in timber number yet so delivered Provided that the rates of royalty payable under this clause shall be the same as the rates fixed for the companycession area under any new agreement whether with the present companytractor or with other parties subsequent to this agreement or in the event of numbernew agreement being entered into at the rates of royalty set out in clause 20 of this agreement b the companytractor shall be given such reasonable time as in the opinion of the Government may be necessary to allow him to dispose of such of his buildings, mills, railways or other structures erected for the purposes of his business under this agreement as are standing on land at the disposal of the Government.
The familiar yet number 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 companypany limited by shares.
In the year of account ending on 31st May, 1950 the assesseecompany was the owner of about 15 forest leases.
There was numberdispute that those 43,860 tons of logs were delivered against three kinds of assets in the following quantities 1 28,847 tons against number duty paid logs handed over by the asseessee company to the Government.
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.
If the residuary rights and assets had number been acquired by the Government the assessee would have carried on his business for another 3 years and logged and removed the felled trees.
