Calcutta High Court
Commissioner Of Income-Tax (Central) vs Chrestian Mica Industries Ltd. on 4 July, 1975
Equivalent citations: [1977]109ITR517(CAL)
JUDGMENT Deb, J.
1. The following questions of law are involved in this reference under Section 66(1) of the Indian Income-tax Act, 1922:
" (i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sale made by the assessee of mines and mining rights did not amount to a venture in the nature of trade or trading transaction so "that the surplus is not assessable as business profits ? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no profit under Section 10(2)(vii) of the Indian Income-tax Act, 1922 ? "
2. The assessment year is 1957-58. The previous year ends on December 31, 1956. The assessee is a company. In the assessment-year, the assessee made a profit of Rs. 6,25,444 by transferring certain machinery and plants to five newly floated 100% subsidiary companies of the assessee and also made a profit of another sum of Rs. 17,16,369 by selling certain mining rights, buildings and other plants and machinery to those subsidiaries. The assessee did not disclose those transactions in the assessment year and accordingly they were not taken into consideration by the tax officer and from his assessment order dated March 29, 1962, the assessee filed an appeal on some other grounds with which we are not concerned.
3. While that appeal was pending, the Commissioner of Income-tax caused a show-cause notice, dated September 6, 1962, under Section 33B of the Act to be served on the assessee. Instead of appearing before the Commissioner and without making out any case whatsoever on the merits, the assessee wrote two letters dated September 26, 1963, and February 2, 1964, to the Commissioner, who, on February 24, 1964, passed an ex parte order under Section 33B by cancelling the said assessment order and directing the tax officer to make a fresh assessment after serving the statutory notice on the assessee and giving the assessee an opportunity of being heard on these transactions.
4. On appeal, the Tribunal set aside the said order of the Commissioner by its order dated August 2, 1967, in which the Tribunal, inter alia, stated as follows :
"The points now raised are questions which can be decided by us without any investigation into further facts. The relevant facts are matters of record and the Commissioner of Income-tax has not referred to any facts other than those on record. "
5. And then the Tribunal disposed of the merits of the case in the following terms:
" The next item in dispute relates to the transfer of mining areas and plant and machinery to 100 per cent. subsidiaries. This identical question has been considered by the Tribunal in paragraphs 18 to 22 of its order dated April 22, 1967, in I.T.A. No. 16788 of 1965-66 to which we have made reference earlier. The background of the facts relating to the transfer of mining rights and plant and machinery has been given therein. It is unnecessary for us to set out the facts over again here. We consider that the transfer of the mining rights was not in the course of a venture in the nature of trade or in the course of trading transaction (having regard to the circumstances under which the formation of the subsidiary companies had to be brought about). In our opinion, what was done was merely the enjoyment of the same assets in a different manner. In any event, on the basis of the decision of the Bombay High Court in the case of Rogers and Co. v. Commissioner of Income-tax [1958] 34 ITR 336 (Bom) and of the Calcutta High Court in the case of Commissioner of Income-tax v. Mugneeram Bangur and Co. [1963] 47 ITR 565 (Cal), we hold that no profit Was earned by the assessee as a result of the transfer, Therefore, there is no profit in sale of any mining rights or plant and machinery to be assessed."
6. Mr. Roy, the learned counsel for the assessee, has rightly conceded before us that question No. 2 should be answered in the negative and in favour of the revenue in view of the decision of the Supreme Court in the case of Commissioner of Income-tax v. B. M. Kharwar . In that case the Supreme Court has expressly disapproved those two decisions relied on by the Tribunal on Section 10(2)(vii) of the Indian Income-tax Act, 1922. Hence, we return our answer to question No. 2 in the negative and in favour of the revenue.
7. There is no dispute that the Tribunal has disposed of the merits of the case by simply following the earlier order dated April 22, 1967, passed by an earlier Appellate Tribunal in I.T.A. No. 16788 of 1965-66, in which the present assessee was the appellant and its subject-matter was the order of the Appellate Assistant Commissioner dismissing the appeal filed by the assessee from the assessment order for the assessment year 1958-59. In the instant reference before us the assessment order for the year 1958-59, and the order of the Appellate Assistant Commissioner dismissing the said appeal filed by the assessee do not form part of the statement of the case and their copies are not included in the paper book. Now, the relevant portion of the earlier order dated April 22, 1967, is as follows :
"Grounds Nos. 30 to 38.--These relate to the assessment of profit on transfer of mining rights and machinery to the subsidiary companies. The Income-tax Officer brought to assessment a sum of Rs. 4,21,023 as arising from the sale of mines and mining rights arid Rs. 52,778 as profit on sale of plant and machinery to Kariatari Mica Mining Co. Ltd. The Income-tax Officer has dealt with these points in paragraphs 19 to 31 relating to the sale of plant and machinery. In reply to a query of the Income-tax Officer as to why the profit in question should not be assessed, the assessee made certain oral submissions which are recorded in paragraph 20 of the assessment order. We may reproduce the same as it sets out the assessee's case :
'The business of the assessee consists in mica mining, manufacturing and sale. The mining rights and areas and plant and machinery under consideration were the assessee's capital assets. However, under Rule 35 of the Mineral Concessions Rules framed under the Mines and Minerals (Regulation and Development) Act, 1948, a maximum ceiling of 10 sq. miles was fixed on the holding of mining areas by any single person. Originally, this provision did not govern the leases granted before October 25, 1949. But, under Clause 15 of the Mineral Concessions Development Rulers, 1956, it was further provided that all the mining leases granted beyond that" date would be brought into conformity with the new provisions. In 1956, therefore, for the first time a ceiling was imposed on the maximum holding of the assessee's mining rights and as the company held, in fact, mining areas far in excess of 10 sq. miles it thought it necessary and expedient to float some 100% subsidiary companies and to transfer the excess mining areas to them. The real intention, therefore, was only to save the company from the clutches of the law without losing control over the capital assets1 in question. The profit earned, therefore, should not be held as a taxable revenue item'."
8. The Income-tax Officer has gone on to discuss a lot of materials which has hardly any bearing on the point in issue before us. The company was formed on May 13, 1946, and the Income-tax Officer has relied on Clause 3(6) of the memorandum of association which is as under :
" to purchase, take on lease or in exchange, hire or otherwise acquire and to let out, hire and trade with any movable and immovable property and any right or privilege which the company may think necessary or convenient for the purpose of its business and in particular any lease, buildings, works, quarries, minerals, easements, machinery, plant, stock-in-trade, boats, vessels and rolling stock."
9. It is submitted by the learned counsel that this was merely an empowering object and as a matter of fact the company had no transactions of this nature, i.e., dealing in mining rights ever since its inception right up to the previous year. Even the circumstances of the sale were brought about by the exigencies of change in the mining laws. There was also a circumstance that the transfer of the assets was to a 100% subsidiary of the assessee-company.
10. As regards plant and machinery it was further stated that the agreement for sale was made on October 31, 1956, and the sale was completed on January 4, 1957. It was submitted that so far as the plant and machinery were concerned, possession was handed over even before the previous year and it could not be said that the sale took place this year.
11. The transfer of assets to M/s. Kariatari Mica Mining Co. Ltd. was effected by the deed dated January 4, 1957. Clause (d), inter alia, provides that "the sale of the said immovable properties being the subject-matter of these presents shall be distinct and separate from the sale of the movable properties as aforesaid which are not the subject-matter of these presents shall be treated separately".
12. Clause (e) provides " that all machinery, plant, implements and other movable properties, effects and things referred to above 'have already been delivered by the vendor-company to the purchaser-company and the title thereto is not intended to be passed by these presents or any recitals therein".
12. The consideration was fixed at Rs. 5 lakhs, in respect of which Rs. 6,000 had already been paid on October 31, 1956. The consideration for sale of plant and machinery was Rs. 1 lakh out of which Rs. 4,000 was paid to the assessee-company on October 31, 1956. The balance of Rs. 96,000 was due in respect of plant and machinery, etc., and Rs. 4,94,000 in respect of immovable properties, i.e., the total sum of Rs. 5,90,000 was to be satisfied as follows:
Rs. 3 lakhs to be paid in fully paid up ordinary shares of Rs. 10 each of the purchaser-company ;
Rs. 75,000 within one year from January 4, 1957;
Rs. 75,000 within two years from January 4, 1957 ; and Rs. 1,50,000 to be paid to the trustees under the trust deed dated September 12, 1946.
13. We hold, (1) that the sale of plant and machinery took place before the previous year ; and (2) that the transfer of the mining rights was not in the course of a venture in the nature of trade or in the course of a trading transaction (having regard to the circumstances under which the formation of the subsidiary companies had to be brought about); and (3) that in any event on the basis of the decision of the Bombay High Court in the case of Rogers and Co v. Commissioner of Income-tax [1958] 34 ITR 336 (Bom) and of the Calcutta High Court in the case of Commissioner of Income-tax v. Mugneeram Bangur 6- Co. [1963] 47 ITR 565 (Cal) no profit was earned by the assessee-company as a result of the transfer. We, accordingly, direct that the two sums of Rs. 4,21,023 and Rs. 52,778 be left out of assessment."
14. It is to be noticed here that we have just now answered the following questions in the negative and in favour of the revenue in Income-tax Reference No. 153 of 1968 [Commissioner of Income-tax v. Chrestian Mica Industries of this court arising out of the aforesaid order dated April 22, 1967 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sale of plant and machinery by the assessee to M/s. Kariatari Mica Mining Co. Ltd. took place before the previous year and in excluding the sum of Rs. 52,778 out of the assessee's total income ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sale by the assessee of mines and mining rights to M/s, Kariatari Mica Mining Co. Ltd. did not amount to a venture in the nature of trade or a trading transaction and as such the sum of Rs. 4,21,023 was not assessable as business profit ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in any event no profit was earned by the assessee-company as a result of the said sale, and in directing" accordingly the exclusion of Rs. 4,21,023 and Rs. 52,778 out of the assessee's total income ? "
15. In the statement of the case in Income-tax Reference No. 153 of 1968 [Commissioner of Income-tax v. Chrestian Mica Industries the assessment order for the assessment year 1958-59 and the order of the Appellate Assistant Commissioner were included and their copies were also printed in the paper book. But, as already stated, these two documents do not form part of the statement of case of the instant reference before us.
16. It is well-settled that the principles relating to res judicata do not apply to the income-tax proceedings. Similarly, we cannot take into consideration the facts found by the tax officer in the assessment year 1958-59 inasmuch as the said order of the tax officer do not form part of the statement of the case of the instant reference before us. It is also well-settled that the burden is on the revenue to prove that a particular income is liable to be brought to tax. Hence, it is unnecessary for us to discuss the cases cited at the Bar on these aspects of the matter.
17. We will now dispose of a few minor submissions of Mr. Roy before dealing with his main contentions. It is his submission that the assessment order is not prejudicial to the interests of the revenue inasmuch as there is no finding of the Commissioner that the transfer of the mining rights is an adventure in the nature of trade. But, as the Commissioner was prima facie satisfied that the assessment order was prejudicial to the interests of the revenue, he gave an opportunity to the assessee to place its case before him, but the assessee did not do so, nor did the assessee come out with the merits of the case whatsoever, as already stated.
18. Hence, there was no issue before the Commissioner as to whether the transfer of the mining rights is not an adventure in the nature of trade. In other words, the Commissioner was not called upon to decide this question. Further, the assessee did not disclose this transaction in the assessment year and, therefore, the Commissioner had to cancel the said assessment order and direct the tax officer to make a fresh assessment after serving the statutory notice on the assessee and giving the assessee an opportunity to place its case on merits before the tax officer inasmuch as the Commissioner was of the opinion that the assessment order was prejudicial to the interests of the revenue. Hence, we are not impressed by this contention of Mr. Roy.
19. His next contention is that the sale proceeds is in the nature of a capital receipt, because depreciation has been allowed in the earlier years and the assessee is not a dealer in mining rights. But he has rightly conceded before us that this point raised by him cannot be. determined solely on these two facts but upon consideration of all the relevant facts, materials and the circumstances of this case, The Tribunal has not gone into this question at all nor has stated the relevant facts in this behalf. That apart, no application was made by the assessee to the Tribunal for referring this question under Section 66(1) of the Act, and, therefore, we cannot go into this question at all in view of the decisions of our High Court in the case of Commissioner of Income-tax v. A. K Das . Hence, we are unable to express any opinion on this point raised by Mr. Roy and it will be decided by the Tribunal at the appropriate stage.
20. By placing strong reliance on the observation of the Supreme Court in the case of Commissioner of Income-tax v. Calcutta. Discount Co. Ltd. the effect that an assessee is entitled to arrange his own affairs "to minimise his tax burden", it has been contended by Mr. Roy that the assessee has done the same thing by selling its mining rights to the subsidiary companies. But this plea was not taken before the Tribunal, and that apart, there is no merit in this contention, for the case of the assessee before the Tribunal was that the transfers were made to evade the ceiling on mining areas fixed by the Mineral Concessions Development Rules, 1956, and not for reducing its tax burden.
21. We will now take up the main contentions of Mr. Roy. His submission is that these 100 per cent. newly formed subsidiary companies cannot be treated as third parties, because the assessee has floated them and, therefore, sale to them is not a trading transaction but an enjoyment of the same assets by the assessee in a different form as held by the Tribunal. But these subsidiaries are independent legal entities and they cannot be treated as third parties. Therefore, sale to them is no less a sale to the third parties. Further, the fruits of these transfers absolutely belong to these subsidiaries and not to the assessee who, as a shareholder, has certain specific rights including a right to receive dividend under the Companies Act, and, therefore, there is no merit in this contention.
22. His next submission is that the circumstance under which the subsidiary companies were brought into existence is the only relevant factor which determines this issue, namely, that the sale of the mining rights to these subsidiaries is not a trading transaction nor an adventure in the nature of trade. But it is well established by numerous decisions of the Supreme Court including the cases of G. Venkataswami Naidu & Co. v. Commissioner of Income-lax , Jankiram Bahadur Ram v. Commissioner of Income-tax and Khan Bahadur Ahmed Alladin & Sons v. Commissioner of Income-tax , that all relevant facts and materials that are brought on the record by the tax officer must be taken into account by the Tribunal for the purpose of determining whether'_a transaction is in the nature of trade and it being a mixed question of fact and law the Tribunal must also apply its mind to the primary facts and then apply the legal principles involved in the statutory expression "adventure in the nature of trade " used in Section 2(4) of the Indian Income-tax Act, 1922.
23. It has also been held by the Supreme Court in the above cases that the answer to this question does not depend upon the application of any abstract rule, principle or formula but upon the total impression and effect of 'all the relevant facts and circumstances that are brought on the record by the income-tax authorities.
24. It has also been held by the Supreme Court in the case of Commissioner of Income-tax v. Indian Woollen Textiles Mills , that if the Appellate Tribunal do not consider the evidence covering all the essential matters and base its finding on some evidence only, ignoring other essential matters, it would amount to a misdirection in law. Therefore, there is no merit in the contention of Mr. Roy that the circumstances under which the subsidiaries were brought into existence is the only factor which determines the character of these transactions.
25. It has also been contended by him that we must accept the finding of the Tribunal, namely, that " the transfer of the mining rights was not in the course of adventure in the nature of trade or in the course of the trading transaction (having regard to the circumstances under which the formation of subsidiary companies had to be brought about) ", in view of the decisions of the Supreme Court in the cases of India Cements Ltd. v. Commissioner of Income-tax , Hooghly Trust (Private) Ltd, v. Commissioner of Income-tax [1969] 73 ITR 685 (SC), Raram Chand Thapar & Bros. P. Ltd. v. Commissioner of Income-tax , Commissioner of Income-tax v. Rajasthan Mines Ltd. , Commissioner of Income-tax v. Kamal Singh Rampuria and Karnani Properties Ltd. v. Commissioner of Income-tax , inasmuch as the revenue has not questioned the above finding of the Tribunal as perverse. We are, however, not impressed by his contention.
26. It is well settled that the finding of the Tribunal to the effect that the transaction is not a trading transaction or not in the nature of trade is a conclusion of law and, moreover, this very question has been referred to this court by the Tribunal. That apart, in jankiram's case , no fact was challenged by the assessee and yet the Supreme Court went into the question as to whether the transaction was an adventure in the nature of trade. Further, in the case of Raja Bahadur Kamakhya Narain Singh v. Commissioner of Income-tax , the Supreme Court, at pages 267-68 of the report, observed as follows:
"In our view the Tribunal misdirected itself in applying the law to the facts found by it both in the matter of gold and shares, and the High Court would have been entitled to interfere with its findings instead of holding that it could not do so as the findings were findings of fact. The questions involved being mixed questions of fact and law, the hypothesis on which the High Court acted that the findings were purely findings of fact and, therefore, were unassailable was in our view not correct." It is to be noticed here that in that case the Supreme Court answered the question as to whether the transactions were in the nature of trade inasmuch as all the relevant facts were before the Supreme Court. Therefore, the question now before us is whether on the facts stated by the Tribunal we are in a position to answer this question. It has been argued by Mr. Roy that the Tribunal has accepted the facts stated by the assessee relating to the transfer of mining rights in paragraph 18 of the order dated April 22, 1967, and, therefore, this question can be answered on those facts, because the facts found by the tax officer in the assessment year 1958-59 have no bearing on this question, as held by the Tribunal. But in the order dated April 22, 1967, the Tribunal has expressly recorded that the tax officer has discussed " a lot of materials " and the Tribunal gave no reasons whatsoever for excluding those facts found by the tax officer and relied only on the circumstances under which the subsidiary companies were formed, but, again, these circumstances cannot alone determine this issue, as already stated.
27. The Tribunal, in our opinion, has not properly applied its mind and has misdirected itself in law on the merits of the case. The Tribunal has not stated all the facts in the statement of the case nor has discussed them in its order. In these circumstances, we are unable to answer question No. 1 and by following the decisions of the Supreme Court in the cases of Commissioner of Income-tax v. George Henderson & Co. Ltd. and Raghunath Prasad Poddar v. Commissioner of Income-tax , we send back the matter to the Tribunal for its decision on the merits of the case on additional evidence that may be adduced by the revenue and the assessee. The Tribunal will also decide whether the realisations can be brought to tax either as revenue receipts or as capital gains as contended on behalf of the revenue before us, including the question as to whether the transfer of mining rights is a transfer of capital asset and as such cannot be brought to tax as contended on behalf of the assessee before us.
28. In the facts and circumstances of the case, we make no order as to costs.
Pyne, J.
29. I agree.