COMMISSIONER OF INCOME TAX Vs. KHAIRAGARH TIMBER TRADERS

JUDGEMENT

(1.) THE question of law referred in this reference is as follows:

(2.) THE reference arises out of the proceedings for a continuation of the registration of the assessee-firm for the year 1973-74. THE facts briefly stated are that Rani Padmavati Devi, wife of the former ruler of Khairagarh, obtained the lease of a forest block from the ruler on 29th December, 1947. THE area included within the block was 5,585 acres. After the merger of the State of Khairagarh, the Governor of Madhya Pradesh on 23rd June, 1953, executed a lease deed in favour of the Rani. Under this lease the Rani is required to pay annual rent of Rs. 100. THE lease is a perpetual lease. THE lease authorises the Rani to exploit the forest within the leased area in accordance with the working plan sanctioned by the Government. It further provides that the Rani shall have a right over all the timber and fuel trees and all other forest produce of the leased forest. A partnership deed was executed first in 1963 for exploiting the forest, THE partnership was registered under the I.T. Act and continuance of registration was granted in subsequent years. In 1971 the partnership was reconstituted by the retirement of one partner and the induction of a new partner. THE registration of this partnership was also granted. When the continuation of registration applied for the assessment year 1973-74, the 1TO refused continuation on the ground that the partnership did not carry on any business in the relevant previous year. THE AAC granted continuation, as in his opinion, the partnership carried on business. THE Appellate Tribunal also took the same view.

(3.) THE I.T. Act does not deal merely with business of selling or purchasing. Under Section28 of the Act, the profits and gains of any business which was carried on by the assessee at any time during the previous year are taxable. Under the term "business", as defined in Section2(13) of the Act, it is not essential that there should be a series of transactions, and, even a single transaction may constitute business: (See Kanga and, Palkhivala's Income Tax, 7th Edn. vol. 1, p. 114), In Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC), the assessee was a company formed with the objects of acquiring and disposing of underground coal mining rights in certain coal fields. THE leases were acquired for a term of 999 years and were sublet for the balance of the terms of the respective leases minus two days. THE company never worked the coal fields with a view to raising coal, nor did it acquire or sell coal raised by the sub-lessees. THE Supreme Court held that the transaction of granting sub-leases was in the nature of a trading transaction. It was observed that the ownership of property and leasing it out may be done as a part of a business, or it may be done as a land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. This case was followed in S. G. Mercantile Corpn. P. Ltd. v. CIT [1972] 83 ITR 700 (SC). In this case a company took on lease a market place. It developed the same and let out the portions thereof as shops, stalls and ground spaces to shopkeepers, stallholders and daily casual market vendors. It was held that the taking of property on lease and sub-letting the portions thereof was part of the business and trading activity of the company. THE principle of these cases applies to the instant case. THE partnership was obviously formed for carrying on the business of exploitation of forest. THE genuineness of the partnership is not disputed. Further, it is not stated that the partnership deed restricts the partnership business to the exploitation of forest by directly cutting and removing forest produce and does not permit exploitation of the forest by giving short term leases of the same to other persons. In these circumstances, the activity in the relevant previous year of leasing out the forest to the contractors and recovering royalty from them was in the nature of business activity assessable under Section 28. THE learned standing counsel has relied upon the decisions of the Supreme Court in Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC) and New Savan Sugar and Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC). In the first case the assessee-firm ceased to do trading activity and let out the plant and machinery to a company formed to take over the business. It was held that the letting out of the plant and machinery by the assessee-firm to the company could not be held to fall within the definition of "business". In the second case, the assessee-company discontinued the business of crashing sugarcane and refining as advised by its managing agents and leased out 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. It was held that the rental income was not business income. On facts these cases are distinguishable, as the assessee in these cases let out the assets with the intention of closing the business or when his business had come to a close which is not the position in the instant case.