Ukhara Estate Zamindaries (PVT.) Ltd. v. Commissioner of Income-tax, West Bengal, Calcutta
TULZAPURKAR, J.-These appeals by special leave .involve a
• common question regarding the taxibility of certian amounts receiv-
1' ed by the appellant company (hereinafter referred to as "the as
~ sessec'') during the three· accounting years, namely, 1359 B.S., 1360
S.S. and 1361 B.S. relevant to the assessment years 1953-54,
1954-55 and 1955-56 and the question is whether those amounts
represented business income or receipts of a capital nature . ?
The facts giving rise to the question may brieJiy be stated : The
assessee was incorporated on July 3, 1920 for the purpose of taking
over the Zamindari properties pertaining the Ukhara Estate which
belonged to Rai PulliJi Behari Singha Bahadur and the late Gosta
Behari Lal Singha. Therefore, on incorporation, by an Indenture
dated July 5, 1920 the assessee took a lease of the extensive Zamin
dari pertaining to the said Estate for a term of 999 years and also
y took an assignmeut of movables, including Government promissory
notes and jewellery belonging to the members of the lessor's family
and the arrears of rents and cesses, debts, decrees, etc. due by the
tenants of the said Estate, the properties passing to the assessee being
specified in the schedule appended thereto. The consideration for
the said lease and assignment was fixed at Rs. 4,08,000/- which was
paid and satisfied by the assessee by allotting and issuing its 4,080
fully paid up shares to the lessors. The quit rent receivable by the
lessors for the lease Rs. 100/- per annum and the assessee also under-
., . .,.,)r took to pay the revenue and cesses payable to the superior landlords
in respect of the Zamindari. Clause 3 of the Memorandum of Asso
ciation set out the various o'bjects for which the assessee was formed
~ and though sub-cl: (a) thereof showed that the assessee was primarily
.l incorporated for the purpose of taking over the assets of the lessoni
family upon the terms and conditions set forth in the Draft Agree
ment referred ta in Article 3 of the Articles of Association, sub-cl.
' (b) of cl. 3 of the Memorandum empowered the assessee "to pur
" chase, take on lease or otherwise acquire and to traffic in land, house
and other property . . . . . . . . and generally to deal in vr traffic by
way of sub-lease, exchange or otherwise with land and house pro-
perty .......... " The Estate taken on lease comprised substantial
~o=l bearing lands an~ mines which the assessce started giv-.
m,, on .sub-lease m vanous parcels to well-known colliery companies
for vanous terms of long duration. During the three accounting
years in question the assessee granted several sub-leases for which it
rece'.ved salami and premia and there were also acquisitions of the
portrons of the Estate by the Land Acquisition Collector for which
it received compensation. The total amount of salami, premia and
the compensation received by the assessee in the three acconnting
years were respectively Rs. 22,197 /-, 1,88,417 /r and 73,327 /- and
the question arose whether these receipts were business income or
receipts of a capital nature. The Income-tax Officer rejected the
contention of the assessee that the receipts were of a capital nature
and he included the said amounts in the total income of the assessee
in each year as its busines; ·income holding that the assessee
carried on business in leasehold rights and real property. On appeal
by the assessee, however, the Appellate Assistant Commissioner
reversed the finding of the Income Tax Officer, and excluded the
amounts in question from the total income of the assessee following
the decision of the Tribunal rendered on June 7, 1960, in the asses
see's case for the earlier assessment year 1946-47, 1947-48 and
1948-49. The matter was carried by the Income-tax Officer in
further appeals to the Tribunal, but the Tribunal by its common
order dated June 29, 1963 dismissed the departmental appeals hold
mg ·that the receipts were of a capital nature not liable to be inclnded
in the taxable income of the assessee. In coming to that conclu
sion the Tribunal mainly relied upon cl. 3 · (a) of the Memorandum
of Association, Article 3 of the Articles of Association and the terms
and conditions set forth in the Draft Agreement (in accordance with
which the Indenture dated July 5, 1920 was executed) which .show
ed that the assessee had been primarily incorporated for the purpose
of the conservation and management of the Family Estate of the
lessors, that, in fact, the assessee was not carrying on the business
of taking leases and granting sub-leases inasmuch as it had not taken
on lease any other property from any one else since 1920 upto date
and that the transactions of granting sub-leases of long duration to
various colliery companies were by way of management of real pro
perty by the assessee as owner of lease-hold interest and as such the
receipts on account of salami, premia and compensation were of a
capital nature. The Tribunal relied upon and applied the ratio of
the decision of the Madras High Court in P. K. N. Company v.
Commissioner of Income Tax(') which has since been confirmed by
this Court in 60 I.T.R. 65.
(!) 47 !. T. R. 195.
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UKHARA ZAMINDAR!l!S v. C.I.T. (Tulzapurkar, !.) 715
ArThe instance of the Revenue the Tribunal referred to the High A
Court for its opinion the following questions :
"Whether on th~ facts and in the circumstances of the
case, the Tribunal was justified in excluding the sums of
Rs. 22,197/r, Rs. 1,'88,417/- and Rs. 73,327/- from the
total income of the assessec for the years 1953-54, 1954-
55 and 1955-56 '?"
The High Court answered the question in favour of the Revenue by
holding that the receipts were not of a capital nature and were includ-
ible in the total income of the assessec as its business income. The
High Court took the view that the assessee could not be regarded as
a purely family concern incorporated for the preservation and mana
gement of the family assets for maintenance of the lessor's family
especially as no provision had been made in its · Memorandum of
Association or Articles of Association conferring any right or share
on new men1bers that may be born in the . coparcenery, it being
admitted that Ukhara Zamindars constituted a Mitakshara Joint
Family. Relying upon the several objects set out in the Memoran
dum of Association, particularly the one indicated in cl. 3 (b) (which
permitted trafficking by way of sub-leases) and further relying on
what it called two special features of the assessee, namely,. declara-
tion of dividend· and creation of reserve fund by it, the. High Court
held the assessee to be a trading concern and that it had dealt with
its lease-hold rights in the lands as trading assets by using them to
earn income, rent, royalty, salami, premia, etc. and, therefore, the
receipts by way of salami or premia ·were trading receipts and pro-
fits thereform were business income. In other words, the High
Court held that the assessee as. a trading concern had dealt with its
lease-hold interest. in Zamindari property not as an owner but as a
trader and, therefore, the receipts in question were includible in the
total income of the assessee as business income. The High Court
relied upon the decision of this Court.in Karnapura Development Co.
Ltd. v. Commissioner 'Of Income-Tax, West Bengal (1). It is this
. view of the High Court that bas been challenged before us hy the
counsel for the assessee in these appeals.
In support of the appeals counsel for the assessee raised two or
three contentions. In the first place be contended that the High
court was in error in coming to the conclusion that the assessee was
a trading concern and that it ba:d dealt with its leasehold interest in
the Zamindari property as a trading asset by using the same to earn H
income, rent, royalty, salami, premia, etc. He pointed out that in
(1) 44 I. T. R. 622
coming to that conclusion the High Court had wrongly allowed it
self to be conside~ably influenced by the three factors : (a) exis
t:n~e of several ob1ects .set out in cl. 3 of its Memorandum of Asso
crntmn, (b) declaration of dividend by it and ( c) creation of re
serve fund by it, as according to him none of these factors wollld
show that· the assessee had actually dealt with its leasehold interest
in the Zamindari property as a trader. Secondly, he contended that
~he real question was whether after incorporation and after acquir
mg the lease of the Zamindari Estate, which included substantial coal
bearing lands and mines, the assessee had dealt with its leasehold
interest as a landowner or not and he urged that the manner in which
the assessee granted sub-leases of the lands in different parcels to
various well-known colliery companies for various terms of long
duration extending over 900 years clearly showed that such transa~
tions of granting sub-leases were transactions in the nature of mana
gement of the estate as owner of the l~nd and, t)ierefore, the receipts
by way of salami, premia and compensation will have td be regarded
as receipts of a capital nature and in that behalf he placed reliance
upon cl. 3 (a) of the Memorandum, Article 3 of Articles of Associa
tion and the terms and conditions of the Draft Agreement in accord
.dance with which the Indenture dated July 5, 1920 was executed,
which showed that the assessee had been primarily incorporated for
the purpose of preservation .and management of the faEily Estate of
the lessors. He also pomted out that admittedly it was not the busi
ness of the assessee. to run collieries nor did it in fact run any colli-
ery on its own but it merely granted sub-leases of various parcels of
land to colliery companies which were transactions by way of mana
gement of the family Estate in fullfilment of the primary object for
which it was incorporated. In support of his contentions he relied
upon this Court's decision in P. K. N. Co's case (supra).
On the other hand, counsel for the Revneue pressed for our
acceptance the view taken by the High {)oiJrt. In particular, he
invited our attention to cl. 3 (b) of the Memorandum of Association
which conferred power on the assessee not merely to purchase, take
G on lease or otherwise acquire and to traffic in land, house and p'f:her
property bnt also "generally to deal in or traffic by way of sub-lease,
exchange or otherwise with land and house property etc." and urged
that the several transactions of granting sub-leases of coal bearing
lands and mines ~O' various colliery companies on payment of rent,
royalty, salami and premia must be regarded as business transactions
If entered into in pursuance of-its trading object and, therefore, the
High Court was right in coming to the conclusion that the assessee
had ·dealt with its rights in leasehold land as stock-in-trade or trad-
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UKHARA ZAMINDAR!ES V. C.I.T. (Tulzapurkar, l.) 717
ing assets and the receipts by way of salami, premia or compensa- A
tion were its business income. For the reasons which we shall in
dicate presently it is impossible to accept the High Court's view in
the matter and we have to uphold the conclusion reached by the
Appellate Tribunal.
The legal principle or the test which should govern the question
of the type that has arisen in these appeals has been clearly enun
ciated by this Court in Karanpura Development Co. Ltd. case (supra).
The assessee in that ca.Se was a company formed with the object,
inter alia, of acquiring and disposing of underground coal mining
rights in certain coal! fields. The Memorandum of Association of
the company enumerated other objects, such as coal raising, but the
assessee restricted its activities to acquiring coal mining leases over
large areas, developing them as coal fields and then sub-leasing them
to collieries and other com~anies. The leases were acquired for a
term of 999 years and were' sublet for the balance of the term of
the respective leases minus two days. The company never worked
the coal fields with a view to raising coal, n,or did it acquire or sell
coal raised by the sub-lessees. As against a salami of Rs. 40/- per
bigha which the assessee had paid, it realised from the sub-lessees
Rs, 400/- per bigha as salami. In addition, the assessee charged
certain royalties at rates higher than those it had agreed to pay under
the head leases. The company adrrlitted that the income from the
royalties was taxable. The question was whethe_r the amounts
received by the assessee as salami for granting the sub-leases consti
tuted trading receipts in its hands and the profit therefrom was
assessable to tax under the Indian Income-Tax Act, 1922. Having
regard to the objects for which the company was formed as well as
the nature of operations, which the company indulged in, this Court
held that the transactions of acquiring leases and turning them to
account by way of sub-leases were in the nature of trading activity
within the objects of the company and not enjoyment of property as
land owner and the amounts received by way of salami were trading
receipts and the profits therefrom were liable to income-tax. Observ-
ing that the dividing line between the two types of operations was
difficult W find and after referring to a number of decisions both
English and Indian, this Court at page 3 77 of the report enunciated
the principle in the following words :
"Ownership of property and leasing it out may be
done as a part of business, or it may be done as land
vwner. Whether it is the one or the other must neces- H
sarily depend upon the object with which the act is done.
Jt is not that no company can own property and enjoy it
(I
as property, whether by itself, or by giving the use of it
to another on rent. Where this happens, the appropriate
head to apply is "iricome from property" (section 9), even
though the company may be doing extensive business
otherwise. But a· company formed with the specific
object of acquiring proporties not with the view to leasing
them as property but to selling them or turning them to
account even by way of leasing them out as an integral
part of his business cannot be said to treat them as land
owner but as trader. The cases which have been cited in
this case both for and against the assessee company must
be applied with this ·distinction properly borne in mind.
In deciding whether a company dealt with its properties as
owner, o'ne must see not to tbe form which it gave to the
transactions but to the substance of the matter."
The other decision of this Court in P. K. N. Co's case (supra}
is equally important, for, certain aspects and their significance in
determining the question in the instant case have been clarified. Jn
that case the partners of a firm, known as 'P.K.N.' formed a private
company and transferred to it all their assets and properties consist
ing of 3000 acres of rubber and coconut plantations besides vacant
sites and houses. The membership of the company was' restricted to
the members of PKN firm and in consideration of the transfer of all
the assets and properties of the aggregate value of 16,50,000 dollars
to the company, the partners, of the firm were allotted shares of
the face value of 6,60,000 dollars, .the balance remaining outstand
ing as a debt due to the firm. Limitations on the admission of the·
members t.o the company and other attendant features indicated an
intention of conserving the properties of the members of the firm
The Memorandum of Association of the company specified, inter alia,
the following objects : (i) to purchase or acquire and to sell.
turn to account, dispose of and deal with property and rights of any
kind, and (ii) to sell, manage, develop or dispose of or otherwise
deal with any part of the properties, rights and privileges of !he
company. Large amounts of money were spent on cultivation and
development of rubber and coconut plantatfons and substantial in
come was derived therefrom but certain uneconomical and inconven
ient plots were sold by the company in 1940 and 1941. Between
the years 1942 and 1945, when Malaya was under Japanese occupa
tion, some further plots of hind were sold. Thereafter, in 1948,
1949 and 1950, lands were sold from time to time at profit. As a
result of these disposals, the total holding of the company was re
duced to about 2,000 acres of rubber estates, some houses and the
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UKHARA ZAM!NDARIES v. C.l.T. (Tulzapurkar, !.) 719
Lee estate. The question was whether the profits realised by the
company during the accounting year relevant to the assessment year
1951-52 from the sale of the properties to the tune of 1,41,326
Malayan· dollars could be brought to tax ? On these facts this
Court held that the primary objcci of the company was to take over
the assets of the firm, to carry on the business of planters and to earn
profits by the sale of rubber; the acquisition of the estates was not for
the purposes of carrying on business in real estat.c. This Court further
held that the incidental sale of uneconomical or inconvenient plots of
land could not convert what was essentially an investment into a busi
ness transaction in real estate. The amount of 1,41,326 Malayan dollars
being capital accretion was not chargeable as income. Such cohclusion
was reached notwithstanding that the Memorandum of Association of
the company conferred power on it to sell or turn to account, dispose
of or deal with the properties and rights of all kinds. This Court
clarified the significance of three aspects thus : (a) the purposes or
objects for which a limited company was incorporated had no decisive
bearing on the question at issue, (h) the circumstance that a single
plot of land was acquired and was thereafter sold as a whole or in plots
was not decisive and ( c) nor was profit motive in entering into a
transaction decisive, but the question whether in purchasing and selling
land the. tax-payer entered upon a business activity had to be deter
mined in the light of the facts and circumstances.
In the instant case also the main question that arises for determi
nation is whether, after acquiring leasehold interest in Zamindari Estate
in granting the several sub-leases of .coal bearing lands and mines and
receiving the salami and premia and in receiving compensation for
compulsory acquisition of its lands the assessee dealt with its lease
hold interest in the lands as a land owner or carried on business with
it treating it as its stock-in-trade or trading asset? It is obvious that
if the· case falls within the former category the receipts by way of
salami, premia and compensation will be capital receipts but if it falls
within the latter the receipts will be trading receipts and profits there
from business income. Having regard to the ratio of the decision in
Karanpura Development Co's. case (supra) it is clear that for deciding
that question regard must be had to the real nature and object or pur
pose of the transactions entered into by the asscssee over the years.
Before we proceed to examine the nature and object or purpose of
the transactions we would like to point out how and where the High
Court has gone wrong in answering the issue against .the assessee. In
1 he first place the High Court has erroneously treated the 1 assessee
as a trading concern qua its leasehold interest in the Zamindari/ estate
without actually examining the real nature and object of the transac•
(I'
tions of. sub-leases entered into by the assessee with several colliery
comparues. Secondly, in arriving at that conclusion the High Court
has been greatly influenced by three factors (a) existence of the
~ower in its Memorandum of Association enabling the assessee to
mdulge in trafficking in land by way of sub-leases of the land, (b)
declaration of dividend at a high rate of 25 % by the assessee for the
relevant years and (ill) creation of reserve fund by the assessee pur
suant to certain Articles of Association and the High Court has given
such undue weight to these factors that it was almost regarded them
as decisive factors. P.K.N. Co's case (supra) has clearly laid down
that the existence of the power in the Memorandum of Association to
traffic in sub-leases of lands though relevant would clearly be not
decisive. In our view, declaration of dividends and creation of a
reserve fund are not features peculiar to a trading concern, for, it is
equally conceivable that a non-trading incorporated entity like an in
vestment company can declare dividends and may also create a reserve
fund and, therefore, these so-called 'special features' are not decisive
of the question whether the incorporated entity is a trading concern
or not. Iu deciding that question what is of importance is how it has
dealt with its assets or properties, whether as a land owner or a trader
treating the assets or properties as its stock-in-trade and it is the
manner of dealing with its a~sets, the real nature of the operations
pertaini'ng to them and the object with which such o~rations are done
that assume importance. This aspect has not been properly consi
dered by the High Court.
Looking at the issue from the aforesaid angle there are several
facts and circumstances emerging from the record which clearly show
that the assessee has been dealing with its leasehold interest in Zamin
dari property as a land-owner and not as a trader. In the first, place,
as has been rightly found by the Tribunal, the assessee was primarily
incorporated for the purpose of preservation and management of the
family estate of the lessors. This is clear from cl. 3(a) of the Memo
randum of Association, Article 3 of the Articles of ~ssociation and
the terms and conditions set forth in the Draft Agree'ihent in accor
dance with which the Indenture dated July 5, 1920 was executed.
That this was the primary object also becomes clear from the facts
that a nominal quit rent of Rs. 100/- per year was payable by the
assessee to the lessors for the lease of the Zamindari Estate obtained
by it for 999 years and that alongwith the · lease the assessee also
obtained an assignment of moveables including Government promis
sory notes and jewellery belonging to the members of the !e.'!SOl'S'
family; assignment of Goverrunent promissory notes and jewellery
could only be for preservation and better management. The Higb
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UKHARA ZAMINDARIES v. c.I.T. (Tulzapurkar, !.) 721
Court felt what militated against the concept of the assessee being
purely a family concern incorporated for tbe purpose of preservation
and management of family assets for the maintenance of lessors' family
was that no provision has been made in its Memorandum of Associa-
' tion and Articles of Association conferring any right or share on new
members th~t may be born in the Mitakshara Joint Family of the
lessors but it is difficult to appreciate this view. On the other hand,
allotment of shares of the assessee to a few members of the lessors'
family and absence of a provision. conferring any right or interest in
the shares on the new arrivals in the family would be more condu
cive to preservation and proper management of the family assets.
Secondly, admittedly since £920 up to date the assessee had not
taken lease of any other property from any one else except the lease
of the Zamindari Estate under the Indenture dated July 5, 1920, a
pointer to the fact that the assessee did not indulge in any business
of acquiring other lands.
Thirdly,-and this is vital-the manner in which the assessee
dealt with the leasehold interest in Zamindari Estate obtained under
the. Indenture dated July 5, 1920, over the years clearly shows that the
transactions of granting sub-leases of coal bearing lands and mines
were by way of management of the · Estate as land-owner. The
Tribunal in its earlier order dated June 7, 1960 for the assessment
years 1946-47, 1947-48 and 1948-49 a copy of which had been made
a part of the record of the case, has brought out certain relevant facts
in that behalf. The Tribunal has pointed out that during the first
11 years of its incorporation the assess~e did not grant any sub-lease
of land to any one. In 1339 B.S. the assessee received a sum of
Rs. 7,500/- on account of salami or premia from Burrakur Coal Co.
Ltd., a party who was already a lessee under the predecessors of the
assessee in respect of coal mining right in mouza Bankola; in 1340
B.S. there was another lease gra.nted to the said coal company where
the premium was 2,893-7-0. Thereafter for several years there was
no lease granted to anybody. In 1349 B.S. another lease was granted
to the same Burrakur Coal., the premium being Rs. 2268-12-0. In
1350 B.S .. there was no lease granted to anybody. Then between
1351 B.S. and 1354 B.S. several sub-leases of different parcels of coal
bearing lands and mines were granted by the assessee to well-known
companies for varying terms of long duration extending over 900 years
for which the assessee received salami and premium but the fact that
such sub-leases were for long duration extending to over 900 years
tlearly shows that the same parcel of land had been dealt with only
once for granting the sub-leases. In the three accounting years rele
l'llllt to the assessment years in question in the instant case also sub-
-
leases had been granted of different parcels for long duration of over
900 years. Such manner of dealing with lease hold interest by the
assessee over the years clearly shows that these transaction of grant·
mg sub-leases were in the nature of acts done in the manauement of 0
the Estate. The object in granting such sub-leases was not to deal
with the lease-bold interest as a stock-in-trade or trading asset. The
dealings ca11not be regarded as business transactions in real property.
Fourthly, though the Memorandum of Association empowered the
assessee to do business in collieries, admittedly it did not in fact run
or work any colliery ou its own nor did auy business as miners or
coal dealers or coke manufacturers, mica dealers, etc.
Having regard to the above facts it seems to us clear that the
receipts on account of salami, and premia received by the assessee
during the accounting years in question, must be regarded as receipts
of a capital nature. So far as the amounts of compensation received
by the assessee for compulsory acquisition or portions of land are con
cerned, the same would obviously partake the character of capital
receipt inasmuch as compulsory acquisition could not be said to be a
voluntary transaction or a. voluntary deal entered into by the assessee
with the Land Acquisition Collector and the compensation would be
a substitute for the capital asset lo.st by the assessee.
In our view, therefore, the High Court had erred iu answering
the question in favour of the Revenue and the Tribunal's view that the
receipts in question were receipts of a capital nature and, therefore,
-not includible in ·total income of the assessee, was correct.
In the results the appeals am allowed and the Revenue will pay the
costs of the appeals to the assessee.
P.B.R. Appeals allowed.
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