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PETITIONER: COMMISSIONER OF INCOME-TAX, WEST BENGAL II

       Vs.

RESPONDENT: RAJASTHAN MINES LTD., CALCUTTA

DATE OF JUDGMENT: 05/05/1970

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. SHAH, J.C. GROVER, A.N.

CITATION:  1970 AIR 1560            1971 SCR  (1) 517  1970 SCC  (2) 158  CITATOR INFO :  RF         1973 SC2330  (12)  RF         1986 SC1691  (12)

ACT: Indian  Income-tax  Act,  (11  of  1922)-Assessee  purchases proprietary rights with arrears of rent and  royalty-Whether receipt  of  the arrears  taxable-Assessee  sells-Profit  if taxable-finding  of  Tribunal,  if open to  review  by  High Court.

HEADNOTE: The assessee-company purchased the proprietory interests  in lands rich in coal and fireclay.  The deeds assigned to  the assessee  the vendors right to receive arrears of  rent  and royalty  in pursuance of the agreement between  the  vendors and third parties.  Later the assesses sold its right  since it  could  not  win the mines for  want  of  finances.   The Income-tax  Officerassessed the entire arrears of rent,  and royalty to tax in the assessee’s hands as revenue  receipts. He also assessed the profit of the sale to tax as a business transaction.  The Appellate Assistant Commissioner, and  the Tribunal  agreed with the orders.  The Tribunal  found  that the  assessee was heavily indebted to the vendor  but  there was  no evidence that the payment of the amount was  pressed for; the memorandum of association of the assessee empowered it  to acquire, sell and dispose of and deal with mines  and mining properties; as a major part of the land purchased  by the assessee was in possession of other mining companies, it was  pot  possible for the assessee to undertake  any  large scale  and profitable mining operations; the  assessee  sold the  lands purchased by it for a profit; and the  properties purchased  were  sold very soon after they  were  purchased. But  the High Court differed from these  conclusions.   Dis- missing the appeals, this Court HELD  : (i) The purchase of the right to collect arrears  of rent  and royalty could not be considered as an income.   It was true that the assessee purchased the lessors’ right from the  vendor in pursuance of the agreements entered  into  by the vendor with third parties whose rights had been acquired by the assessee.  The assessee company had been incorporated

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on  Jan.  23, 1947.  Therefore, it could not  have  got  any right in the property prior to the conveyance in its  favour on  Dec. 22, 1947.  As per the terms of the conveyance,  the assessee becomes entitled to the arrears of rent and royalty as a purchaser of those rights.  It had no right to  collect these  arrears  of  rent and royalty as  the  owner  of  the property.   It may be that in determining the price  payable under  the conveyance, the arrears of rent and royalty  were not  taken into consideration.  But that did not change  the nature of the right acquired by the assessee. [520 D] (ii)The findings of the Tribunal did not afford any basis to it to come to the conclusion that the purchases made by  the assessee  and  the subsequent sale were in the nature  of  a trading adventure.  The circumstances that the memorandum of association  of  the  assessee  permitted  the  assessee  to acquire  and  sell  and dispose of  and  deal  with.  mining properties  was an inconclusive one.  It was not shown  that the  assessee had acquired or sold any other property.   The fact  that  the assessee sold property purchased by  it  for profit was not decisive in finding out whether the sale  was effected  in  the course of the business  of  the  assessee. From the Tact 518 that  the  assessee  could not  undertake  large  scale  and profitable  mining in the area which was in its  possession, no  inference may be drawn that lands were acquired  with  a view  to  sell  later  on  nor  the  circumstance  that  the properties  were  sold very soon after they  were  purchased affords  any  basis  for the conclusion  that  the  sale  in question was effected in the course of the business. [52 B] (iii)If  the finding of fact is based on an  inference  from the  primary  evidentiary  facts proved  in  the  case,  its correctness  or validity is open to challenge  in  reference proceedings  within  narrow  limits.  It  is  open,  to  the parties  to  challenge  a conclusion of fact  drawn  by  the tribunal on the ground that it is not supported by any legal evidence  or  that the impugned conclusion  drawn  from  the relevant  facts is not rationally possible.  If such a  plea is  established, the Court has to consider whether the  con- clusion  in  question  is  not  perverse  and  should   not, therefore,  be  set aside.  On the facts of this  case,  the High Court was justified in examining the correctness of the inference drawn by the Tribunal on the basis of the  primary facts found by that Tribunal. [521 E] G.   Venkataswami  Naidu and Co. v. Commissioner of  Income- tax, 35 I.T.R 594; followed.

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos. 1627  and 1628 of 1968.  Appeals from the judgment and order dated January 19,  1965 of  the Calcutta High Court in Income-tax Reference No.  240 of 1961. S.   Mitra,  G. C. Sharma, R. N. Sachthey and D. B.  Sharma, for the appellant (in both the appeals). The respondent did not appear. The Judgment of the Court was delivered by Hegde,  J.  This  appeal  by  certificate  arises  from  the decision of the Calcutta High Court rendered in a  reference made to it by the Income Tax Appellate Tribunal, ’B’  Bench, Calcutta  under S. 66(1) of the Indian Income-tax Act,  1922 (which  will  hereinafter  be referred  to  as  the  ’Act’). Alongwith its statement of case, the tribunal submitted  two

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questions to the High Court for its opinion.  They are :               "(1)   Whether  on  the  facts  and   in   the               circumstances  of  the case, the sums  of  Rs.               2,55,733/-  and Rs. 3,00,332/-  receivable  by               the  assessee as arrears of royalty  and  rent               were assessable as the income of the  assessee               for  the assessment years 1948-49 and  1950-51               respectively ? and               (2)Whether  on the facts and  circumstances               of  the case the sum of Rs.  2,80,000/-  being               the surplus derived by the assessee on sale of               property  was assessable as the income of  the               assessee for the assessment year 1950-51 519 The  facts set out in the statement of the case,  in  brief, are a,-, follows : The assessee M/s.  Rajasthan Mines Ltd. is a public  limited Company incorporated on January 23, 1947.  The Raja of  Ram- garh  was  the  landlord of the North  and  South  Karanpura fields covering about 312 villages.  Those, tracts of  lands were rich in coal and fireclay.  M/s.  Karanpura Development Co.  Ltd.,  held coal mining licence in about  14  of  those villages.  It also held fire,clay leases in about 8 villages and  leases of other minerals in portions of  two  villages. That Company had also a prospecting licence for the coal  in the said fields with the option to take further coat  mining leases.   The leases were also held by three  other  parties namely  South  Karanpura Development  Ltd.,  Janab  Mohammad Kamruddin  and  Jagadish Prasad ghagat in respect  of  other parcels  of  land, in these fields.  By an  indenture  dated December  22,  1947  (registered on the  26th  of  February, 1948), in pursuance, of agreements dated September 20,  194$ and  August 7, 1947, the assessee acquired from the Raja  of Ramgarh proprietory intetest in all those leased out  lands, more  fully specified in the schedule appended to  the  said indenture.  By the said indenture, the Raja of Ramgarh  also transferred  and  assigned  to the  assessee  his  right  to receive  the  arrears of rent and royalty from  the  lessees with effect from September 1, 1946.  The consideration  paid by  the  assessee  for the acquisition  of  the  proprietory rights with the right to realise and recover the arrears  of rent and royalties was Rs. 5 lacs. For the assessment year 1948-49, the Income-tax Officer  as- sessed  the  entire amount of arrears of  rent  and  royalty receivable  from  the said lessees, from September  1,  1946 upto the date of conveyance namely December 22, 1947, as the assessee  income  for the previous year ended on the  31  st March,  1948.   The net amount included  in  the  assessment under that head was Rs. 2,55,733/-. In the previous year ended on December 31, 1949 relevant for the assessment year 1950-51, the assessee purchased  another ,lot  of  villages  from  the Raja of  Ramgarh  as  per  the conveyance  dated  January  24, 1949, in  pursuance  of  the agreements already referred to for a consideration of Rs.  2 lacs with all arrears of rent and royalty which on  December 31,  1948 amounted to Rs. 3,00,332/-.  On August  13,  1949, the assessee sold away his right, title and interest in  the major  portion of the villages acquired under the  aforesaid deeds of conveyance dated December 22, 1947 and January  24, 1949  to Sirka Valley Coal Co. Ltd. and three other  parties for a total sum of Rs. 7,50,000/’-.  The Income-tax  Officer treated the entire arrears of rent and royalty amounting  to Rs.  3,00,332/- as revenue receipts of the assessee  taxable during the assessment year 1950-51.  He also treated the 520

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-sale of the lands by the assessee as a business transaction and  taxed a sum of Rs. 2,20,000/- as the net profit of  the assessee arising from the sale, which profit was  recomputed by  the Appellate Assistant Commissioner at Rs.  2,80,000/-. The   Income-tax  Appellate  Tribunal  agreed   with   those conclusions. The  High Court of Calcutta differing from  the  conclusions reached  by  the  Income-tax  Officer,  Appellate  Assistant Commissioner  and the Tribunal came to the  conclusion  that the sums of Rs. 2,55,733/- and Rs. 3,00,332/- receivable  by the  assessee  as  arrears  of royalty  and  rent  were  not assessable as the profits of the assessee for the assessment year  1948-49 and 1950-51 respectively.  It  also  disagreed with  the  conclusions reached by  the  Income-tax  Officer, Appellate  Assistant  Commissioner  and  the  Tribunal  that profit  made by the assessee by the sale of  the  properties purchased from Raja of Ramgarh was assessable as the  income of the assessee for the assessment year 1950-51.   Aggrieved by  that order, the Commissioner of Income-tax, West  Bengal has come up in appeal to this Court. We are in agreement with the High Court that the purchase of the  right to collect arrears of rent and royalty cannot  be considered  as  an  income.  It is true  that  the  assessee purchased  the  lessor’s right from the Raja of  Ramgarh  in pursuance  of the agreements ,entered in to by the  Raja  of Ramgarh with third parties whose Tights had been acquired by the  assessee.  The assessee company bad been  incorporated, as  seen earlier, on January 23, 1947.  Therefore  it  could not  have  got  any  right in  the  property  prior  to  the conveyance  in its favour on December 22, 1947.  As per  the terms  of the said conveyance, the assessee became  entitled to  the arrears of rent and royalty as a purchaser of  those rights.   It had no right to collect those arrears  of  rent and  royalty as the ,owner of the property.  It may be  that in determining the price payable under the conveyance,  the, arrears   of   rent  and  royalty  were   not   taken   into consideration.   But that does not change the nature of  the right  acquired  by the assessee.  Hence we agree  with  the High Court that the first question referred to earlier  must be ,answered in favour of the assessee. Now  coming  to  the  second  question,  according  to   the assessee, it purchased the tracts of land in question with a view to win mines but for want of finance, it was  compelled to  sell the same.  The primary facts found by the  tribunal are:  (1)  the  assessee was heavily  indebted  to  Raja  of Ramgarh but there was no evidence to show that the Raja  was pressing  for the payment of the amount due to him; (2)  the memorandum  of association of the assessee gave it power  to acquire, sell and dispose of and deal with mines and  mining properties; (3) as a major part of the land purchased by the assessee   was  in  the  possession  of  the  other   mining Companies, it was not possible for the assessee to undertake any large scale and 5 2 1 profitable  mining  operations; (4) the  assessee  sold  the lands  purchased by it for a profit and (5)  the  properties purchased were sold very soon after they were purchased. The above findings did not afford any basis to the  tribunal to  come  to the conclusion that the purchases made  by  the assessee  and  the subsequent sale were in the nature  of  a trading adventure.  The circumstance that the memorandum  of association  of  the  assessee. permitted  the  assesses  to acquire,  and  sell  and dispose of and  (teal  with  mining properties  is  an inconclusive one.  It is not  shown  that the, assessee had acquired or sold any other property.   The

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fact  that  the assessee sold property purchased by  it  for profit is not decisive in finding- out whether the sale  was effected  in  the course of the business  of  the  assessee. From  the fact that the assessee could not  undertake  large scale  and  profitable mining in the area which was  in  its possession,  no  inference  may be  drawn  that  lands  were acquired with a view to sell later on, nor the  circumstance that  the  properties were sold very soon  after  they  were purchased affords any basis for the conclusion that the sale in question was effected in the course of the business.  The primary  facts  found either individually,  or  collectively could  not  have  afforded  a  basis  for  arriving  at  the conclusion that the transaction in question was an adventure in trade. It  was urged on behalf of the Revenue, that the finding  of the tribunal that the purchase and sale of lands, were  made in  the course of business being a finding of fact,  it  was not  open to the High Court to interfere with that  finding. But  as observed by this Court in G. Venkataswami Naidu  and Co. v. Commissioner of Income-tax(1), if the finding of fact is based on an inference from the primary evidentiary  facts proved  in the case, its correctness or validity is open  to challenge in reference proceedings within narrow limits.  It is  open  to the parties to challenge a conclusion  of  fact drawn by the tribunal on the ground that it is not supported by any legal evidence or that the impugned conclusion  drawn from the relevant facts is not rationally possible.  If such a plea is established, the court has to consider whether the conclusion  in  question  is not perverse  and  should  not, therefore, be set aside.  On the facts of this case the High Court  was  justified in examining the  correctness  of  the inference drawn by the Tribunal on the basis of the  primary facts found by that Tribunal. For  the  reasons mentioned above, we agree  with  the  High Court  that  the  second question referred  to  it  for  its opinion must also be answered in favour of the assessee. In the result these appeals fail and they are dismissed. Y.P.                                                 Appeals dismissed. (1)  35 I.T.R. 594. 5 2 2