1985-VIL-248-PAT-DT

Equivalent Citation: [1985] 156 ITR 206, 52 CTR 258, 23 TAXMANN 229

PATNA HIGH COURT

Date: 17.05.1985

COMMISSIONER OF INCOME-TAX

Vs

KUYA AND KHAS KUYA COLLIERY CO.

BENCH

Judge(s)  : NAZIR AHMAD., UDAY SINHA 

JUDGMENT

UDAY SINHA J.-These are six references under s. 256(1) of the I.T. Act, 1961, on the following questions of law.

" (1) Whether, on the facts and in the circumstances of this case, the Tribunal were correct in law in holding that the income received from the managing contractor by leasing out the colliery was a business income ?

(2) Whether, on the facts and in the circumstances of this case, the Tribunal were correct in law in allowing continuation of registration to the firm ?

The assessee is a partnership firm, constituted by deed of partnership dated January 2, 1963, consisting of P. K. Agrawal, D. K. Agrawal and J. K. Agrawal as partners. Extraction and winning of coal was the business of the firm. By an agreement dated April 26, 1965, the partners leased out the colliery to M/s. Kuya Colliery (P.) Ltd., Calcutta, with effect from April 5, 1965. Till the assessment year 1966-67, the income of the firm was assessed under the head " Business ". For the assessment year 1967-68 also the partnership firm filed return showing income from colliery as income from " Business ". Along with the return, the assessee filed an application under s. 184(7) of the I.T. Act. The Income-tax Officer (herein after called " the ITO ") held that consequent upon the execution of the agreement of April 5. 1965, the income of the firm had ceased to be income from " Business " and was assessable under the head " Other sources " and not under the head " Business ". In his view, the agreement of April, 1965, created a sub-lease in favour of the managing contractor. The assessee had, therefore, ceased to do business in colliery operations. The stand of the assessee was that its income was liable to be assessed under the head "Income from business" under s. 28 of the I.T. Act. The ITO rejected the application of the assessee under s. 184(7) of the Act to be treated as a firm and assessed it as unregistered firm. The assessee filed an appeal against the rejection of his application for continuation of registration of the firm as also against the assessment orders. The ground common to both sets of appeals was that the partnership was entitled to be registered as a firm and its income to be treated as income from business. In the appeal against assessment and the refusal to continue the registration of the firm under s. 184(7), the Appellate Assistant Commissioner (hereinafter called " the AAC ") accepted the stand of the assessee and allowed the appeals. The Department went up in appeal before the Income-tax Appellate Tribunal, Patna, against the appellate orders as also against the orders allowing continuation of registration to the firm. The six appeals were disposed of by the Tribunal by a common judgment. The Tribunal concurred with the view of the AAC and thus dismissed all the appeals. On being asked by the Department to refer a case, the Tribunal has stated it and referred the questions of law, mentioned above, for determination by this court.

The questions referred to us for our opinion have to be answered on the ratio of the decision of the Supreme Court in New Savan Sugar and Guy Refining Co. Ltd. v. CIT [1969] 74 ITR 7. That decision was followed by Untwalia C.J. (as he then was) and N. P. Singh J. in Khas Benedih Colliery v. CIT [1974] BBCJ 440. A discordant note was struck by S. K. Jha J. to which N. L. Untwalia C.J. (as he then was) was also party in CIT v. S. K. Sabana and Sons [1976] 102 ITR 437 (Pat). In the view of S. K. Jha J., New Savan Sugar and Gur Refining Co. Ltd.'s case [1969] 74 ITR 7 (SC) was decided on facts different from the facts of S. K. Sahana and Sons' case [1976] 102 ITR 437 (Pat).

There can be no doctrinaire approach to the question posed before this court. The question as to whether an income can be treated as income from business or not will have to be determined in the light of the nature of the transaction evidenced by the terms of the agreement. The Tribunal was of the view that the continuation of registration had nothing to do with the leasing out of the colliery and, therefore, following a decision of the Punjab High Court in Nauharchand Chananram v. CIT [1971] 82 ITR 189, it held that despite leasing out the colliery, the firm was carrying on "business." The view of the Punjab High Court was not approved by the Division Bench of this court in the case of Khas Benedih Colliery [1974] BBCJ 440 in paragraph 5. I can do no better than to quote the observations of Untwalia C.J. (as he then was). His Lordship observed as follows :

5. Learned counsel for the assessee then submitted on the basis of some observations of the Punjab High Court in the case of Naukarchand Chananram v. Commissioner of Income-tax [1971] 82 ITR 189, that it mattered little whether the partnership was for the purpose of earning profit within the meaning of section 10 of the Indian Income-tax Act, 1922, corresponding to section 28 of the Act, or whether it was deriving income from some other sources under section 12 of the old Act, corresponding to section 56 of the Act. In my opinion, this argument is in the teeth of the definition of 'partnership' given in section 4 of the Indian Partnership Act, 1932, as also against various forms prescribed for applying for registration or for filing of declarations. It is also against the decision of the Calcutta High Court, with which I respectfully agree in the case of Sunil Krishna Paul v. Commissioner of Income-tax [1966] 59 ITR 457. "

From the above, it is obvious that the reliance placed by the Tribunal on the case of Nauharchand Chananram [1971] 82 ITR 189 was misplaced. If a firm is not carrying on business, it cannot be a partnership, for partnership is the relation between persons who have agreed to share Profits of a business. The crucial question, therefore, is whether the partnership firm of the assessee was carrying on business even after the colliery had been leased out to the managing contractor. On the authority of the Supreme Court case in New Savan Sugar and Gur Refining Co. Ltd. [1969] 74 ITR 7 and CEPT v. Shri Lakshmi Silk Mills [1951] 20 ITR 451, it must be held that letting out of business as a whole is distinct from letting out commercial assets of the firm. If the business as a whole is let out, the income (i.e., the rent) would not be liable to be assessed as income from business. If only the commercial assets are leased out, the income would continue to be income from business. In the instant case, whether the agreement created a lease of the colliery itself and thereby lease of the business itself or whether it was a lease of only commercial assets has to be decided. The question at issue can be resolved only by looking to the terms of the agreement. The agreement and the power of attorney executed in favour of the lessee were not on the record, but Mr. K. N. Jain, for the assessee, has filed copies thereof to make out his point that the lease was not of the colliery itself, but was a lease only of commercial assets. Correctness of the deed is not challenged by counsel for the Department. I shall, therefore, proceed on the basis of the said deed to resolve the point at issue.

As I said earlier, the Chief justice Untwalia in the case of Khas Benedih Colliery [1974] BBCJ 440, held that the agreement spelt out a sub-lease although in form it was a deed of agency. The income of the assessee in that case was held to be income from " other sources " and not from business ". The correctness of that decision has not been doubted. It would, therefore, be useful to take note of the similarity of the terms in the agreement in that case with those in the instant case. A copy of the agreement of Khas Benedih Colliery's case [1974] BBCJ 440, was available in the paper book of that case which we called for our perusal. The copy, of the agreement of the instant case under consideration before us was not on the record, but the learned counsel for the assessee placed it on the record. Learned senior standing counsel had no objection to the agreement being placed on record and being treated as part thereof.

The salient aspects of the agreement in the Khas Benedih Colliery were the following :

(i) The proprietor described the second party as " The Agent".

(ii) The principals or the proprietor appointed the agent for carrying on the colliery works and coal business of the Khas Benedih Colliery.

(iii) The agent was authorised to take charge of the colliery, coal land, surface lands, quarries, inclines, machinery, colliery sidings, buildings, offices, bungalows, dhowrahs, structures, tools, plants, fixtures, and furniture, etc. During the term of the agency, the agent was to have full charge and control over the mines, quarries, inclines, etc., of the colliery as also of its development and work in raising, despatching and selling of coal and coke without any hindrance, interference, interruption or objection whatsoever on the part of the Principals.

(iv) The agent was to carry on the colliery works and the coal business by investing his own finance and the principals were not to be called upon to provide for any finance for the business.

(v) The agent had full liberty to purchase new machineries and instal the same in the colliery and to electrify the mine. The agent was empowered to appoint staff and employees and labour including a qualified mine manager, the salaries and remuneration for which had to be paid by the agent and not by the principals. The agent was given full power and right to discharge and dispense with the services of any employee including the manager. All liabilities of the colliery of any nature including provident fund, bonus, etc., were to be paid by the agent and not by the principals.

(vi) The Principals had no right to interfere in any way with the running, management, working, raising and despatching of coal by rail or road.

(vii) The agent was liable to pay all Government dues and dues of local authorities. The principals would incur no liability on those accounts.

(viii) The agent had to keep in deposit with the principals a sum of Rs. 25,000 by way of security deposit. The deposit would bear no interest and would be adjusted at Rs. 3,571.42 annually for seven years.

(ix), The agent was enjoined to pay to the principals their share of Profit and guaranteed profit of the colliery- .(a) Rs. 1,50 per tonne on all coal raised and despatched from the colliery or sold locally

(b) Rs. 1,50 per tonne on all soft coke made and despatched from the colliery or sold locally :

Provided always that the aforesaid payments and Rs. 2.50 per tonne on all hard coke manufactured and despatched from the colliery or sold locally was subject to a minimum payment of Rs. 25.2.00 per year. In case profit on the basis of Rs. 1,50 on coal and soft coke and Rs. 2.50 on hard coke fell short of Rs. 25,200 in any particular year or years, the principals would be entitled to get from the agent Rs.25,200 for the year or years in which the profit calculated at the above mentioned rates per tonne of coal or coke despatched fell short of the aforesaid amount. The aforesaid minimum guaranteed amount of Rs. 25,200 per year was payable in twelve equal instalments by the 15th day of the next following month..

(x) At the end of each calendar year, accounting was to be done between the principals and the agent for determining the amount of profit and guaranteed profit payable by the agent to the principals. If, on accounting, it was found that the share of profit calculated on the above basis exceeded the minimum guaranteed amount, the balance would be paid by the agent within two months from the date of accounting. If, on the other hand, it fell short of the minimum guaranteed amount already paid by the agent to the principals, the agent was not required to pay further amount towards the guaranteed profit or profits.

(xi) The principals or their representative Would be at liberty to stay in the entire portion of the proprietor's bungalow and the agent was to provide all facilities including supply of free electricity or water for their stay there.

(xii) The principals had executed and registered a general power of attorney in favour of the agent.

(xiii) By the power of attorney the agent was authorised to operate the bank accounts in the name and style of " Khas Benedih Colliery Any cheque or pay order of Khas Benedih Colliery received by the principals had to be forthwith handed over to the agent.

(xiv) The agent was bound to enter or cause to be entered in proper books of account, the true and correct statements of raisings and despatches of coal and was to offer all such account books and statements to the principals for inspection during all reasonable hours.

(xv) The agreement could not be terminated within three years from the date of the agreement.

(xvi) The principals were enjoined not to sell, transfer or mortgage or in any manner part with the colliery or allow or suffer it to be sold in any legal proceedings.

(xvii) The agent was entitled to construct buildings, etc, at his own expense.

(xviii) The principals or their nominees were entitled to have three tons of steam coal per month at the colliery for their use.

(xix) In case of any accident in the mining operation carried on by the agent, the Principals would not in any circumstance be liable for the effect thereof.

(xx) The agent undertook to forward to the principals three copies of monthly statements of raisings and despatches of all coal and coke from the colliery each month.

(xxi) The agent was required to submit to the principals a clearance certificate quarterly showing clearance and paying up all Government and other dues. (xxii) Principals had the right to inspect any underground and surface work with a duly qualified mining engineer after giving prior information to the agent.

From the above, it will be seen that although the second party was described as " agent ", yet it was held to be a " contractor ". Untwalia C.J. held that the use of the words " principal " or " agent " throughout the deed was a misnomer. Another aspect worthy of note is that the lessee had to pay to the principals certain sums which were described as profit and guaranteed profit. They were held to be fixed incomes payable by the agent/contractor to the principals and not profits of the business. They were treated as rent for leasing out the business. The principal was entitled to reside in the bungalow of the colliery. Second party was obliged to let him have the benefit of water and electricity. The lessee was required to deliver three tons of steam coal to the principals every month. The agent was required to maintain accounts and make it available to the principals for inspection. The principals had the right to inspect any underground and surface work and, yet, Untwalia C.J. (as he then was), held that the dominant object of the lease was not to grant lease of the commercial assets, retaining some business activities with the lessor, but to grant a sub-lease of the colliery business.

Let us now consider how much similar is the nature of the terms of the lease in the instant case to those of Khas Benedih Colliery's case.

(i) The assessee has been described as " proprietors " and the second party to the deed as " managing contractor ".

(ii) The agreement was to last for ten years. Managing contractor was given full power and authority to search for, get quarry, win and dig coal by all accepted and recognised mode of coal mining.

(iii) The managing contractor was entitled at its own cost to instal such machinery and to bring such chattels and utensils at the colliery as he may in his discretion think fit and proper for the purpose of working of the colliery.

(iv) The managing contractor was given the right, but at its own cost to build on any portion of the surface land of the colliery as he may think fit.

(v) During the term of the agreement, the business of the colliery had to be carried on by the managing contractor in the name of the said firm, M/s. Kuya and Khas Kuya Colliery Co., under which name and style it was being worked prior to the agreement.

(vi) All costs charges and expenses for working of the colliery and for carrying on the said business had to be borne and paid by the managing contractor. The contractor was bound to indemnify and keep indemnified the proprietors and their estates.

(vii) All coal raised and coke manufactured at the colliery was to be treated as the property of the managing contractor who was entitled to sell or otherwise dispose of the same for its own absolute use and benefit.

(viii) Managing contractor was entitled to sell and dispose of all coal raised and coke manufactured to such party as the managing contractor thought fit. The contractor, however, was enjoined that delivery in respect of all sales of coal must be made by railways and not otherwise.

(ix) The contractor was entitled to endorse or negotiate any cheques that may be drawn in favour of the proprietors or their firm.

(x) The proprietors undertook to execute in favour of the managing contractor or its nominee an irrevocable power of attorney for the purpose of working and managing the colliery and the managing contractor undertook to indemnify the proprietors and the firm against all losses, damages and expenses of suits.

(xi) In the event of the proprietors receiving any money or cheques drawn in their favour or the firm, Kuya and Khas Kuya Colliery Company by any party to whom the managing contractor may sell or supply coal, to make over the said money or cheque to the managing contractor.

(xii) The managing contractor was given full authority to appoint any manager, clerks, workmen or any employee for the working of the colliery on terms which the managing contractor may think fit and appropriate.

(xiii) The managing contractor had to bear all expenses for working the colliery including salaries and wages of any of the employees of the colliery.

(xiv) In consideration for the transaction, the managing contractor bound himself to pay to the proprietors, i.e., the assessee, as guaranteed income or profit from the colliery, a sum calculated at the rate of Rs. 1.50 per ton of coal and Rs. 2/4 per ton of soft coke and Rs. 2/8 per ton of hard coke raised or manufactured and despatched by them. Besides this, the managing contractor undertook to pay a monthly rent of Rs. 2,500 for the use of plant, machineries, buildings, etc. The managing contractor also bound himself to the proprietors to pay a sum of Rs. 25,000 per year by way of minimum guaranteed income on profit that may be realised or earned by the managing contractor by the sale of the coal or coke. The balance was to be appropriated by the managing contractor. Proprietors shall have no claim whatsoever thereon or on any portion thereof (i.e. profit).

(xv) The managing contractor was bound to keep and maintain proper books and registers showing raisings and despatches of coal and coke. The books and registers were open to inspection of the proprietors.

(xvi) The managing contractor was bound to prepare monthly returns of coal raised and coke manufactured and despatched from the colliery, and serve one set thereof to each of the parties for the First Part. The proprietors were to pay and clear up liabilities of the firm only till the date of the lease, i.e., April 4, 1965.

The above are some of the salient terms of the agreement arrived at between the assessee and the lessee. The terms of the agreement are substantially, if not completely, the same as in Khas Benedih Colliery's case [1974] BBCJ 440. The lessee was working under a general power of attorney in both the cases. In both the cases, the lessee was required to keep regular accounts and make it available for inspection to the proprietors. The proprietors were entitled only to receive guaranteed income and royalty or commission on extraction and sale of coal and coke. The proprietors had no stake in the losses of the lessee. The proprietors would not gain by the fortunes of Kuya and Khas Kuya Colliery. The entire business was to be controlled by the lessee. The proprietors Were not liable for the dues on account of working of the colliery after the execution of the deed of lease and the lessee or managing contractor or managing agent was not liable for dues incurred on account of the functioning of the colliery prior to the execution of the deed of lease. The lessee in both the cases was required to transmit monthly statement of accounts to the partners of the assessee. With all these similarities, the nature of the transaction in both the cases are alike. I have, therefore, no hesitation in holding that the assessee in this case as well had granted lease of the business of the colliery. The colliery went with the lease of the business to the managing contractor. All that was left with the proprietor was guaranteed income and royalty on raisings and despatches of coal. The assessee had no control over the business. It neither had a stake in the liability nor a share in the profit. The proprietors were not concerned with the waxing and waning of the fortunes of the managing contractor. Come weal come woe, the assessee was not affected by the loss or profit of the business. The conclusion is, therefore, irresistible that the transaction did not involve lease of only commercial assets, but it was a lease of the entire business.

This judgment cannot be complete without adverting to the case of New Savan Sugar and Gur Refining Co. Ltd. [1969] 74 ITR 7 (SC). That was a case where the managing agent of a sugar company leased out the company as a running concern. The consideration of the lease was royalty payable on the manufacture of sugar and gur at rates specified in the deed subject to a minimum royalty. The lessee was responsible for all the running expenses of the factory and excise duty on sugar, etc. In those circumstances, the question arose whether the income which arose to the proprietor from the lease should be assessed under s. 10 or s. 12 of the Indian I.T. Act, 1922. The Supreme Court held that the intention of the appellant (lessor-company) was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as a commercial asset during the subsistence of the lease. According to their Lordships of the Supreme Court, the intention of the appellant was to go out of the business altogether so far as the factory and machinery was concerned with effect from the date of execution of the lease. The position in the present case is exactly similar. The assessee after executing the deed of lease completely effaced themselves from the control of the colliery and business of coal selling. The minimum guarantee or royalty was nothing but rent. In the present case, therefore, also the assessee must be held to have walked out of the business. Their income under the deed must, therefore, be assessed as income from " Other sources " and not as income from " Business".

Learned counsel for the assessee drew our attention and, in fact, with some vehemence, to another Division Bench decision of this court in CIT v. Sabana and Sons [1976] 102 ITR 437. The case before us falls within the parameters laid down by the Supreme Court in the case of New Savan Sugar and Guy Refining Co. Ltd. [1969] 74 ITR 7. The present case is exactly similar to the case of Khas Benedih Colliery [1974] BBCJ 440, The law of the land is what the Supreme Court laid down. We are bound to follow it. My views are reinforced by the decision of Untwalia C.J., in the case of Khas Benedih Colliery [1974] BBCJ 440. It is, therefore, not necessary for me to consider whether the case of Sabana and Sons was correctly decided or not. If the case of the Supreme Court had not been there, I would have been obliged to refer this case to a larger Bench to resolve the apparent conflict between the case of Khas Benedih Colliery and Sabana and Sons. But, as the present case falls within the parameters of the case of New Savan Sugar and Gur Refining Co. Ltd. and I have failed to find any difference between the case of New Savan Sugar and Gur Refining Co. Ltd.(and the present case) the present case is not a case which should be referred to a larger Bench for our consideration. Suffice it to say, that there was no distinguishing feature in the case of Sabana and Sons vis-a-vis the case of Khas Benedih Colliery.

For all the reasons indicated above, I have not the least doubt that the assessee had no " business " to be assessed as such. The income was not income from colliery, but was rent received from the lessee. The contractor was working on the authority of power of attorney in each case. The restriction on despatches of coal by railways was only to ensure a calculation of royalty and minimum guarantee. Those conditions are to be found in all the three cases as well. That income must, therefore, be held to be income from " Other sources ". In regard to the first question referred to us, I am constrained to hold that the Tribunal was not correct in holding that the income received from the managing contractor by leasing out the colliery was income from " Business".

The next question referred to us and stated in paragraph I of the judgment concerns the continuation of registration of the firm. Since I have held that the assessee did not have income from business, it must be held as a corollary that there was no partnership. There cannot be partnership without business. That is obvious from the provisions of s. 4 of the Partnership Act. In my view, therefore, there was no partnership in law. There being no partnership, the registration of the firm could not have been continued. In my view, therefore, the Tribunal was not right on the second question as well. It was not correct in law in allowing the continuation of registration of the firm.

Both the questions referred to us must, therefore, be answered in the negative, in favour of the Revenue and against the assessee. The reference is thus disposed of with costs, Rs. 500 payable by the assessee to the Department.

NAZIR AHMAD J.-I agree.

 

 

 

 

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