Holding

The forest leases are capital assets and the compensation received for their cancellation or sterilisation is a capital receipt, exempt from tax, and no balancing charge applies.

Summary

The Bombay-based Burmah Trading Corporation held fifteen forest leases in Burma for timber extraction. After the Union of Burma nationalised the forest resources, the company surrendered its residuary rights and assets in exchange for 43,860 tons of teak logs, some in lieu of non‑duty paid logs and the rest as compensation for depreciable assets, stores and livestock. The Income‑Tax Officer and the Tribunal treated the proceeds from the logs as taxable revenue, invoking s.10(2)(vii) of the Income‑Tax Act, 1922, but the High Court held the receipts to be capital in nature and exempt. The Supreme Court affirmed that the forest leases were capital assets and that compensation for their cancellation or sterilisation constituted a capital receipt, not subject to tax, and that no balancing charge could be levied because there was no sale at an agreed price. Consequently, the appeals by the Revenue were dismissed.

Issues considered

Whether the forest leases constitute capital assets or stock‑in‑trade.
Whether the compensation received in kind (logs) for surrender of residuary rights is a capital receipt exempt from tax.
Whether the logs received in lieu of depreciable assets, stores and livestock are taxable under s.10(2)(vii) of the Income‑Tax Act, 1922.
Whether a balancing charge under s.10(2)(vii) can be imposed in the absence of a sale at an agreed price.

Legislation cited

Income Tax Act, 1922s. 10(2)(vii), s. 66A(2)

Subjects

capital receiptrevenue receiptforest leasesnationalisationcompensation in kindbalancing charges.10(2)(vii)capital assetsdepreciable assetsstock-in-trade

Judgment

A

C.I.T. BOMBAY CITY
v.
BOMBAY BURMAH TRADING CORPORATION, BOMBAY B
JULY 16, 1986

[SABYASACHI MUKHARJI AND K.N. SINGH, JJ.]

Income-tax Act, 1922, s. JOC2)(vii),lfncome-tax Act, J96J:"'y_ 41111

·Assessee--Nationalisation of business-Compensation recci1'ed c
from Government-Whether capital or revenue receipt-Compensation
in kind in respect of depreciable assets-Whether liable to tax-Fixed
capital and circulating capital-distinction between.

The assessee-Company, carrying on business of selling timber in D
India and abroad, entered into contracts in the nature of forest leases
with the Government of Burma, under which it was authorised to fell
teak trees, convert them into logs, and remove them after payment of
royalty. These leases, which were made first in the year 1862, had been
continuously renewed from time to time. Clause 27 of the agreement
authorised the assessee-company even after the expiry of the lease E
period of 15 years to remove the log,• in respect whereof extraction had
been completed, upon payment of royalty during the next three years.
At the relevant time the assessee-company was the owner of fifteen such
forest leases. The last of these leases commenced on 1st January 1926
and 3 lst December, 1940 was the due dale of expiry. However, before
the expiry of the period, the Second World War started and the Gov- F
ernment of Burma extended them until such time as it became possible
to resume forest operations. After formation of the Union of Burma, the
ownership of the forest leases of the assessee-company was taken over
by the Government of Burma in 1948-49; a third of the total teak area on
June 1, 1948 and the rest on or about June, JO, 1949. In terms of an
agreement dated 10th June, 1949 between the parties the assessee made G
over to the Burmese Government its residuary rights under the forest
leases together with the non-duty paid logs, wherever found, and also
all the assets viz. buildings, dwelling houses, etc. pertaining to the
forest leases and received 28,847 tons of teak lo~s in substitution of
non-duty paid logs, 2,94(l tons against depreciable assets and stores and
12,067 tons against livestock. The logs so received by the assessee com- H
7.69
270 SUPREME COURT REPORTS [1986] 3 S.C.R.

A pany were sold off by it from time to time in the accounting years 1;49,
1950, 1951 and 1952.

The lntome-tax Oflker sought to bring these sale proceeds to tax
by allocating them amongst the various assessment years. The questions
that arose were: (i) whether the realisation in respect of substituted logs
B
was exempt from tax as being a reteipt of capital nature, and (ii)
whether the sale proceeds in respect of logs received in lieu of depreci-
able assets, stores and livestock were liable to tax under the Act or were
altogether free from liability. The Income-tax Officer, the Appellate
Assistant Commissioner and the Tribunal held against the assessee. The
High Court, however, answered the questions in favour of the assessee.
c
In these appeals by certificate under s. 66A(2) of the Income-tax
Ad, 1'122 it was tontended for the Revenue that the contracts entered
into by the assessee company for obtaining its stock-in-trade in timber
were trading contracts, that under cl. 27 of the agreement• the assessee
D
had no interest in land as such, it had only a right to collect and lake
away logs, its stock-in-trade, and it could not fell any fresh trees, that
28,847 tons of logs received by the assessee under the agreement were
in substitution of the logs that it had already cut and had not been able
to remove from the forests, merely as a reco1npense for its righis in the
stock-in-trade, and that the excess realisation in respect of logs received
E
against depreciable assets, stores and livestock were profits and liable
to tax under s. 10(2)(vii) of the Income-tax Act, 1922.

For the assessee-respondent it was contended that the forest leases
constituted the income producing capital assets of the company in
which it had invested large funds in building dams, canals, roads, rail-
F ways, bnidings etc., that the forest leas-. were not ordinary commercial
contracts made in the course of carrying on their trade or for the
disposal of their products, these related to the whole structure of the
assessee's profit making apparatus, that the consideration for the logs
received was the surrender of the residuary rights under the forest
leases and aL'<jUisition of assets of th< business under the take-over
G agreement, that the assessee was prevented from carryin~ on business
upon the nationalisation of forest resources and acquisitiun of residuary
rights and assets pertaining to the forest leases. It was further submit-
ted that the compensation paid to the assessee was the sterilisation of the \-
company's business and thus a capital receipt, not subject to tax.

H Dismissing the appeals, the Court,
C.I.T. "· BURMAH TRADING CORPN. 271

HELD: I. I. The forest leases constituted capital assets of the asses- A
see. The payments made for cancellation or sterilization of the right' under
these leases were, therefore, capital receipt' and not liable to tax. [290E]

1.2. Whether in a particular case payments were capital receipts
or not depends upon the facts and circumstances of the case. The basic B
principles are: if there was any capital asset and if there was any pay-
ment made for acqnisilion of that capital asset, such pay .nent would
amount to a capital payment in the hands of the payee. Secondly, if any
payment was made for sterilization of the very source of profit making
apparatus of the assessee, or a capital asset, then that would also
amount to a capital receipt in the hands of the recipient. If on the other
hand, the leases were merely stock-in-trade and payments were made c
for taking over the stock-in-trade then no question of capital receipt
comes. The snm would represent payments of revenue nature or trading
receipts. Compensation received for immobilisation, sterilization, de-
struction or loss, total or partial, of a capital asset would, therefore, he
capital receipt. If a sum represented profit in a new form then that I)
would be income but where the agreement related to the structure of
assessee's profit-making apparatus and affected the conduct of busi-
ness, the sums received for cancellation Or variation of such agreement
would be capital receipt. [286H; 287A-D]

In the instant case, the forest leases affected the very structure of E
the operation of the assessee. The compensation received for the cancel-
lation of assessec-Company's activities could not be regarded as an
income receipt, nor the legal character of the payment misjudged hy the
magnitude of the payment. [289A; 290C-D]

G/enboig Union Fireclay Co. Ltd. v. The Commissioner of Inland F
Revenue, 12 Tax Cases 427; Senairam Doongarmall v. Commissioner
of Income-tax, Assam, 42 I.T.R. 392 at 406; Commissioner of Income-
/ax, U.P. v. Gangadhar Baijnath, 86 I.T.R. 19; Commissioner of
Income-tax, Poona v. Manna Ramji and Co., 86 I.T.R. 29; Vim Den
Berghs Ltd. v. Clark (H.M. Inspector of Taxes), 3 I.T.R. 17 (En~lish
case): British Insulated & Helsby Cables Ltd. v. Atherton, [ 1926] A.C. G
205; Hood Barrs v. Commissioners of Inland Rei·enue (No. 2), 37 Tax
Cases 188; Commissioner of Income-tax, Hyderabad-Deccan v. Vazir
Sultan & Sons, 36 I.T.R 175, referred to.

2. For levy of a balancing charge under s. 10(2)(vii) of the
Income-tax Act, 1922 it was absolutely necessary that the depreciable H
272 SUPREME COURT REPORTS 11986) 3 S.C.R.

A assets should have been sold at a price agreed to between the parties.
ThP agrPement under which the assessee-company received logs by way
of compensation in lieu of depreciable assets did not involve any trans-
action of sale between it and the Union of Burma. The assessee company
never paid any money by way of a price in respect of assets delivered to
B it by the Government. Therefore, the sale proceeds of these logs could
not be brought to tax against the assessee company under the second
proviso to s. 10(2)(vii) of the Income-tax Act, 1922. [29 ID-F)

Commissioner uf lncume-tax v. Motors & General Stores (P) _'::.
Ltd., 66 I.T.R. 692, refen·ed to.

C 3. The logs delivered to the assessee company in respect of the
depreciable assets, stores and livestock came into possession of the as-
sessee in consequence of the agreement against surrender of all out-
standing or residuary rights of the assessee to the Government. The
arrangement was in consequence of nationalisation of forest operations.
D The fact is that the assessee company did not mix up these logs with any
of the stock-in-trade held by it in its ordinary course of business. The
sale proceeds of these Ioi;s could not, therefore, be held to have been
received by the assessee company on revenue account. Consequently,
the excess realisation recf.ived over the cost incurred in getting delivery
of these logs was not liable to tax under the Act. [291G-H; 292A-C)
E
4. Nothing was paid by the Government to the assessee company
in connection with I/3rd area of the forest leases taken over from the
assessee company. The assessee company had filed a suit in connection
with the timber logs and stores taken over by the Government and
succeeded in obtaining a decree. The sum awarded in the decree in lieu
F of the rights which the assessee company had under cl. 27 of the agree-
ment could not, therefore, be taxed. [292F-G)

5. Normally in trade, there are two types of capital, one circulat-
ing and the other fixed. Fixed capital is what the owner turns to profit
by keeping it in his own possession, circulating capital is what he makes
G profit of by parting with it and letting it change hands. What is capital
assets in the hands of one person may be trading assets in the hands of
the other. The determining factor is the nature of the trade in which the
asset was employed. [287 A-Cl

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. I of
H 1974 and 1355-1356 of 1973.
C.l.T. "· BURMAH TRADING CORPN. [MUKHARJI,J.l 273

From the J udgmcnt and Order dated 22i24.4. l 970 of the A
Bombay High Court in l.T.R. No. Ill of 1963.

B.B. Ahuja and Miss A. Subhashni for the Appellant.

F.N. Kaka, S.N. Talwar, Y. Chaudhary and H.S. Parihar for B
the Respondent.

The Judgment of the Court was delivered by

SABYASACHI MUKHARJI, J. These appeals are from the
judgment and order of the High Court of Bombay dated 22ndi24th
April, 1970. These are by certificate granted by the High Court under C
section 66A(ii) of the Indian Income-tax Act, 1922. The judgment
under appeal is reported in 811. T .R. at page 777.

The familiar yet not always easy to answer question whether a
particular receipt is capital or revenue looms large in these appeals
D
arising out of the assessment to income-tax for the assessment years
1950-51, 1951-52 and 1953-54, the accounting years respectively end-
ing on 31st May, 1950, 31st May, 1951 and 31st May, 1953.

The assessee·is a public limited company limited by shares. lt
derived income from several sources including certain business opera-
E
tions. These operations were carried out in India and abroad and used
to be carried out, inier alia, in Burma and Siam. The assessee company
carried on business in Burma from 1862 onwards. In connection with
its business of selling timber, the assessee-company had to enter into
contracts which are mentioned as 'forest leases' with the Govemn1ent
of Burma. In the year of account ending on 3 lst May, 1950 the assessee-
F
company was the owner of about 15 forest leases. The agreed position
between the parties was that all the forest leases contained provisions
and clauses exactly similar to the speciman copy dated 28th October,
1925, which was taken into consideration by the High Court. It may be
mentioned, however, that the forest leases were for the duration of 15
years and in respect of large areas. Under these leases, the assessee-
G
company was authorised to fell the teak trees and convert them into
the logs and, upon completion of the extraction thereof, to remove the
logs after payment of royalty to the Government of Burma for its own
purposes. Clause 27 in these leases authorised the assessee-company
even after the expiry of the period of 15 years of the lease to remove
the logs in respect whereof extraction had been completed upon pay- H
274 SUPREME COURT REPORTS [1986 J 3 S.C. R.

A ment of royalty. The period for such removal under clause 27 was fixed
at three years after the expiry of the lease period mentioned in clause
4. These leases contained renewal clauses. The forest leases of the
assessee-company did not commence on the same date and related to
different. parts of the forests in Burma. These leases were. made as
mentioned hereinbefore, in 1862 first and had been continuously re-
B newed from time to time.

It was stated that five similar business organisations obtained
forest leases from the Government of Burma for their business in
timber. Before the period of 15 years mentioned in these leases ex- -
'

pired, the Second World War started and the Japanese army overran
c Burma. The then Government of Burma then extended the periods of
current leases until such time as it became possible to resume forest
operations and for such further periods as might be required for settle-
ment of the new forest leases to be executed between these business
organisations and the Government. Upon termination of the hosti-
lities, in connection with the resumption of the forest operations, the
D Government made provisional arrangements in terms of what is refer-
red to in paragraph 7 of the statement of the case as "weight agree-
ment". The Union of Burma came into existence from 4th January,
1948. Under section 44(2) of the Constitution of Burma, there was a
directive for nationalisation, inter alia, of the forest exploitations.
Thereafter correspondence took place, inter alia, between five Euro-
E pean companies who were exploiting forests in Burma under the vari-
ous leases and the Government in connection with the taking over of
the exploitation by the Government of Burma. The High Court noted
the relevant correspondence dealing with such arguments.

On !st June, 1948, a third of the total teak area mentioned in the
F 15 forest leases of the ownership of the assessee-company was taken
over by the Government of Burma. Forest exploitation in respect of
the rest of the 2/3rds area was also taken over by the Government on
or about 10th June, 1949. In that connection, certain correspondence
had been addressed by the assessee-company to the Government. The
Union of Burma on the one hand and the assessee-company and Steel
G Brothers & Company Ltd. on the other executed an agreement dated
10th June, 1949 on the footing that the forest leases had already been
terminated. The agreement provided for making over by the assessee- r
company to the President of the Government of Burma of the
assessee-company's 'residuary rights' under the forest leases together
with the non-duty paid logs wherever found and also for making over
H
C.l.T. v. BURMAHTRADINGCORPN. [MUKHARJl,J.[ 275

of all the assets pertaining to the forest leases, viz., headquarters, A
elephants, cattle, stores, buildings, dewelling houses, motor transport,
tractors, launches, etc. and for certain other incidental matters. The
agreement provided for handing over by the President of the Govern-
ment of Burma the assessee-company of 50 ,000 tons of teak logs of
the specified qualities mentioned in clause 7 of the said agreement. 8
There was no dispute between the parties that in pursuance of the
agreement the assessee-company had made over to the Government of
Burma the assets mentioned in clause 1 of the agreement. There was
also no dispute that in pursuance of the agreement the Government of
Burma handed over in all 43,860 tons of logs to the assessee-company.
There was no dispute that those 43,860 tons of logs were delivered
against three kinds of assets in the following quantities: C

(1) 28, 847 tons against non-duty paid logs handed over by the
asseessee-company to the Government.

(2) 2,946 tons against depreciable assets like land and buildings, 0
launches, furniture and stores.

(3) 12,067 tons against livestock like elephants, etc.

The account of these 43 ,860 tons of logs delivered by the Gov-
ernment was maintained by the assessee-company in what is described E
in the Income-tax Officer's report as "Burma forests assets realisation
reserve account". These 43,860 tons of logs were sold off by the
assessee-company from time to time in the accounting years 1949,
1950, 1951 and 1952. The aggregate sale proceeds during the above
four years came to Rs.1,35,55,611 as appears from the assessment order
which is annexed to the statement of the case. In connection with these F
sale proceeds, the Income-tax Officer stated that, as the receipts and
sales of logs had taken place over a period of four years, the amount
realised had to be allocated amongst the various years. He further
stated that the basis of the allocations was agreed to by the assessee. He
proceeded to make the allocation on the footing that the assessee had
inturred costs for getting delivery of these logs at the rate of Rs.225 G
per ton on 10th June, 1949. He then considered the proceeds realised
and made the allocations for the assessment years 1950-51 and 1951-52
in the manner appearing in paragraph 9 of the statement of the case
submitted to the High Court. Upon allocation made in the above
manner, the Income-tax Officer's finding was that in the year ending
31st May, 1950, the assessee had received 18,676 tons of logs. The sale H
276 SUPREME COURT REPORTS [1986] 3 S.C.R.

A proceeds of Rs.65,52,153 were received in respect of non-duty paid
logs delivered to the assessee-company. The sale proceeds of
Rs.31,980 were received in respect of logs received against depreciable
assets, ~tores and livestock. For the accounting year ending 31st May,
1951, the Income-tax Officer held that the assessee had received in all
B 16,299 tons of logs. The sale proceeds of those logs were allocated as
follows:

"Rs.5,78,896 in respect of non-duty paid logs handed over by the
assessee-company to the Government, Rs.2,69,975 in respect of the
logs delivered against handing over of depreciable assets, stores and
livestock." (81 I.T.R. p. 785.)
c
The question that arose upon such allocations having been made
in the manner indicated was as to whether the receipt of Rs.65,52, 153
in the accounting year ending 31st May, 1950, and Rs.5,78,896 in the
accounting year ending 31st May, 1951 was exempt from tax as being a
D receipt of capital nature as contended by the assessee-company.
Similarly, the further question which arose was as to whether sale
proceeds amounting to Rs.31,980 in the accounting year ending 31st
May, 1950, and Rs.2,69,975 in the accounting year ending 31st May,
1951, in respect of depreciable assets were liable to tax under the Act
or were altogether free from such liability. The Income-tax Officer as
E well as the Appellate Assistant Commissioner made findings against
the assessee companies in connection with these amounts. On behalf
of the assessee-company it was urged before the Appellate Tribunal
that the entire receipt and delivery of the 43,860 tons of logs were on
capital account. The submission was that the assessee's business of
dealing in timber in Burma had got sterilized and the above quantity of
F logs was received only in respect of the said sterilization or loss of the
capital asset. In connection with that submission, the Appellate Tri-
bunal held against the asscssee-company that the assessee's business
had not stopped and there was no question of sterilization of its busi-
ness. The forest leases o"med by the assessee-company had expired
and were not bound to be renewed and the "residuary rights" avail-
G
able to the assessee-company under clause 27 of the forest leases were
merely rights to remove the extracted logs within a period of three
years from the forest areas. The assessee-company had no interest in
land of the forest areas.
r
The Tribunal, however, observed that though the agreement re-
H ferred to certain residuary rights under clause 27 of the agreement
C.I.T.v. BURMAHTRADINGCORPN.[MUKHARJJ,J.[ 277

there was nothing to show that any compensation was paid in respect A
of any rights available to the assessee under clause 27 of the lease
agreement.

The contention that the realisations were in respect of capital
assets was rejected. It was further held that the realisation in respect of
B
logs received against depreciable assets, stores and livestock were pro-
1 fits and liable to tax. In calculating the profits it was held that the logs
received by the assessee-company were received by it at the cost value
of Rs.225 per ton.

After having recorded the findings in the aforesaid manner, the
Tribunal referred to the High Court concerned. i.e., the High Court of c
Bombay, certain questions of law for the assessment year 1950-51 and
1951-52. The High Court felt that question No. 1 in both these assess-
ment years need not be answered and this position was agreed to by .
the parties. The following questions for these two assessment years
were really considered by the High Court: D
"I. Assessment year 1950-51:

1. . ........... .
1
2. Whether, on the facts and in the circumstances of the
E
case, the amount of Rs.65,52,153 or any part thereof was
exempt from tax as being a receipt of a capital nature?

3. Whether on the facts and in the circumstances of the
case, the amount of Rs.1,41, 156 was liable to tax under the
second proviso to section 10(2)(vii) of the Income-tax Act,
F
and whether there was any evidence that the conditions of
the application of that proviso were all satisfied?

4. Whether, on the facts and in the circumstances of the
case, the amounts of Rs.5,250, Rs.1,025 and Rs.25,705,
being the excess realisations over Rs.225 per ton for logs
G
received in respect of depreciable assets, stores and live-.
stock, respectively, were liable to tax under the Act?"

"JI. Assessment year 1951-52:

1. . .......... . H
278 SUPREME COURT REPORTS [1986] 3 S.C.R.

A 2. Whether, on the facts and in the circumstances of the
case, the amount of Rs.5,18,896 or any part thereof was
exempt from tax as being a receipt of a capital nature?

3. Whether, on the facts and in the circumstances of the
B case, the amounts ofRs.44,407, Rs.8,639 and Rs.2,16,929,
being the excess realisations over Rs.225 per ton for logs
received in respect of depreciable assets, stores and live-
stock, respectively, were liable to tax under the Act?"

Similarly for the asSt$sment year 1953-54, the questions referred
by the Tribunal to the High Court were as follows:
c
"1. Whether, on the facts and in the circumstances of the
case, the amount of Rs.5,58,188 or any part thereof was •...\
exempt from tax as being a receipt of a capital nature?

D 2. Whether, on the facts and in the circumstances of the
case, the amount of Rs.9,493, being the amount of com-
pensation received for stores acquired by the Burmese
Government, was liable to tax under the Act?"

The High Court answered all these questions in favour of the
E assessee. The High Court answered for the assessment year 1950-51
the question 2 in the affirmative for the entire amount, questions 3 & 4
in the ne'gative, for the assessment year 1951-52 the serond question in the
affirmative and question no. 3 in the negative. For the assessment year
1953-54 both the questions were answered in the affirmative. The
revenue has come up in appeals.
F
In order to appreciate the controversy, broad features of the ,-
facts, some of which have been noted before, have to be borne in
mind. The business in question of the assessee started in Burma in
1861. There were 15 agreements with the Government of Burma for
exploitation bf forests at the relevant time. The agreements were en-
G tered into at different times and provided for expiry of leases on diffe-
rent dates. At page 27 of the Paper Book a typical agreement dated
28th October, 1925 is indicated. Similar agreements were entered into
for other leases. The terms provided, inter alia, as follows:

Generairights"l. The Contractor shall within the series of coupes into
H of contractor: which the forest area described in Schedule I and hereinafter
C.I.T. v. BURMAH TRADING CORPN. JMUKHARJI, J.J 279

referred to as "the Concession Area" shall be subdivided A
as provided in clause 5 and during the periods for extrac-
tion there from prescribed in clause 6 and subject to such
further conditions, limitations and restrictions as are here-
inafter prescribed have the sole right and license to-
( a) fell the teak trees gridled or marked in that behalf B
by the officers of the Forest Department in accordance
with the directions contained in clause 8 and any naturally
dead standing teak trees;
(b) convert into logs all such trees all naturally felled
teak trees and all felled teak timber left unloged from
former operations; and C
(c) remove all such logs and all logs were left unex-
tracted from former operations:

PROVIDED that is any area
D
to which a scheme for concentrated exploitation accord-
ance with any sanctioned working Plan has been applied
the Contractor shall have no rights in standing teak trees
under five feet six inches in girth measured at breast height
from the ground.
E
Grant of other rights 2, The Government acting on behalf of the Secretary of
in Concession Area. State reserves to itself the right to enter into agreements
with other parties for the extraction of timber other than
that which the Contractor is entitled to extract under this
Agreement from I the whole or from any part of the Conces-
sion Area." · F

The proviso to that clause need not be set out.

Clause 4( I) was as follows:
Period during 4. (I) This Agreement shall come. into force on the 1st day G
~hich Agreement of January, 1926 and shall unless previously terminated un-
is in force. der clause 26 or clause 29 terminated after the expiry of a
period of fifteen years; viz. on the } !st day of December,
1940;

PROVIDED that in respect of the rights conferred by H
280 SUPREME COURT REPORTS [1986] 3 S.C.R.

A clause 27 or by sub-clause (2) of this clause and in respect
of very liability incurred under this Agreement it shall con-
tinue in force for such further period as is necessary for the
enjoyment of such rights and the enforcement of such
liabilities."
ll
Clause 15 of the agreement authorises the assessee company to
cut canals, make water courses, build bridges and other railway works
etc. on certain conditions.

Clause 16 dealt with control of such private railways. Clause 18
dealt with the inspection etc.
c
Other relevant clauses were,

General respon- 19. Nothing herein contained shall be deemed to relieve
sibilities of the Contractor, his agents and servants of the duty of com-
D Contractor. plying with any Act of the legislature and of the rules there-
under at the time being in force and applying to the Con-
cession Area.

20. With thirty days from the dates respectively on which
measurement statf:ments of timber have been furnished to --
E the Contractor by the Forest Department the Contractor
shall pay or to be paid into such Government Treasury as
the Government may appoint royalty in respect thereof
according to the following rate namely:

F "

Clause 21 read as follows:

Marking of timber "21. The Contractor shall be entitled to have the timber
after Measuremenfwhich has been measured for royalty marked at the time of
G measurement with a Government hammer-mark denoting
that the timber has been so measured and after payment of
such royalty the timber thus marked shall become the pro-
perty of the Contractor."
r
Clause 23 was as follows:
H "23. Until teak timber has been marked and royalties have
C.I.T. v. BURMAH TRADING CORPN. JMUKHARJl,J.] 281

~ Teak timber is been paid thereon in accordance with the preceding clause A
Government pro- it shall be deemed to be the property of the Government
perty up to the payand the Contractor shall have no right to sell mortgage or
mentofroyalty. hypot h ecate 1t. or create any charge ot r1en t hereon. ,,
)'
Clause 27 of the agreement provides as follows:
B

·1 "27. On the conclusion of the period specified in clause .J
or on the termination of this agreement under clause 26 or
........ clause 29, as the case may be,-

(a) the contractor shall be allowed a further period of
three years for delivering at a measuring station and re- c
moving therefrom after payment of royalty on or otherwise
dealing as provided in clause 20 with any timber bearing his
authorised hammer-marks the extraction of which has in
accordance with the terms of this agreement been com-
pleted before the date such conclusion or termination and on
D
the expiry of such further period he shall cease to have any
rights whatever in timber not yet so delivered:

....-
Provided that the rates of royalty payable under this
clause shall be the same as the rates fixed for the conces-
sion area under any new agreement whether with the pre-
sent contractor or with other parties subsequent to this E
agreement or in the event of no new agreement being en-
tered into at the rates of royalty set out in clause 20 of this
agreement;
(b) the contractor shall be given such reasonable time as in
the opinion of the Government may be necessary to allow F
him to dispose of such of his buildings, mills, railways or
- ' other structures erected for the purposes of his business
under this agreement as are standing on land at the disposal
of the Government."

Under clause 29 the Contractor was given the rights to terminate G
the agreement at any time by giving two years notice in writing.

f
On the 1st January, 1926, there was commencement of the agree-
ment. 31st December, 1940 was the due date of expiry of the agree-
men!. On 7th April, 1942, there was extension by the Government.of
Burma of the long term agreement till such time as it became possible H
282 SUPREME COURT REPORTS 11986] 3 S.C.R.
A
to resume forest operations and for such further period as might be
required for settlement of new agreements. On 24th January. 1948,
'r·
there was a letter by the Government of Burma to the assessee and
others in connection with ending of joint working arrangements
between consortium of 5 contractors on the one hand and Government
B of Burma on the other hand for exploitation of forests. On 4th
February, 1948, tbere was the assessee's lett~r to the Government of
Burma indicating their specific rights under the Forest Agreement in
respect of logs in the course of extraction on termination of agree-
ments.
r
_,......._
On !0th February, 1948, the Burmese Government replied to the
c assessee's letter dated 4th February, 1948 informing that the normal
period of currency of agreement had already expired, and the life of
the agreement had been prolonged under letter dated 7th April, 1942
and also under the Weight Agreement which expird on !st May, 1947. )._
Government's decision to terminate long term pending lease negotia-
D lions and to terminate on 31st May, 1948 joint operations in the area
intended to be taken over by Government and the Government's in-
tention to consider any claims of residuary rights under the expiring
agreements was also indicated to the assessee. On 10th June, 1949,
there was an agreement between the President of Union of Burma and

E
the assessee and Steel Bros., inter alia, dealing with the residuary
rights under clause 27 of th" 1925 agreement and the settlement to be
made in respect thereof.
.......
The agreement, inter alia, reiterated that whereas under lease
under clause 27, there were certain residuary rights as we have noted
hereinbefore, whereas certain questions had arisen in the settlement
F being made by the Government as regards the said rights as well as the
assets of the lessees in the forest areas which the lessees desired to
surrender to the Government, the parties had agreed to resolve this '
question indicated under clause 1 therein. It is not necessary to set out
the details here. These have been set out at pages 80-81 of the Paper
Book.
- G
We have set out the relevant portions of the material documents
relied before the High Court. It may be mentioned that the High Court
in its judgment has set out the discussion at page 793 of the report (81
I
I.T.R. 777) betwee1< the Government of Burma and the assessee com-
pany. The said discussion recorded is as follows:
H
C.I.T. v. BURMAH TRADING CORPN. [MUKHARJI, J.] 283

"The Government of Burma was always the grantor. Ap- A
parently this was so because the forests were always of the
ownership of the Government. The Government was the
single owner of all the forests. These forests were never
intended to be transferred to any grantee at any time. The
forest leases were always of duration of 15 years or more. B
They always related to extremely large areas which were
sub-divided into large coupes. These coupes were also not
to be worked at the same time, but according to schedule
fixed in respect thereof. Each specified group of coupes
was to be worked within three years. The extraction of the
trees was to be completed within the fixed period of three
years. The schedule fixed was compulsorily to be adhered c
to. The work of extraction was to be done in accordance
with the rules prescribed for felling, logging and removal.
The Government was accordingly not a seller of any stock-
in-trade and the assessee was not a purchaser of any stock-
in-trade. The assessee undertook the obligations of various D
kinds so as to complete the work of extraction as indicated
in the contract. The assessee had to maintain extremely
large establishments and headquarters at various places
and had in that connection put up various permises includ-
ing dwelling houses and buildings. It had to maintain di-
verse sorts of mechanical appliances and had, inter alia, E
owned motor transport, tractors, launches, elephants, cat-
tle and diverse assets for the purposes of working these
forest leases. The Government was not concerned in any
part of the operations relating to the extractions done by
the assessee from the contract area. It is of importance that
the right of extraction and/or to fell, convert and remove F
that was given to the assessee was to be exercised in respect
of the growing forest trees and/or uncut timber. There was
a further right to log all felled teak timber left unlogged
from former operations. The consideration that was
charged by the Government was only the royalty agreed to
be paid to the Government." G
The main question, is, whether the acquisition of forest leases by
the assessee was capital asset or stock-in-trade. The next question
which arises for the first two years is whether there is any scope of
application of section 10(2)(vii) of Indian Income-tax Act, 1922 in
respect of the amount of Rs. l ,41, 156 for the assessment year 1950-51 H
284 SUPREME COURT REPORTS [1986] 3 S.C.R.

A and for 1951-52 whether the amounts of Rs.44,407, Rs.8,639 and
Rs.2,16,929, being the excess realisations over Rs.225 per ton for logs
received in respect of depreciable assets, stores and livestock were
liable to tax under the Act. The two questions relevant for the assess-
ment year 1953-54 will be dealt with separately.
B
The main submission by Shri B.B. Ahuja on behalf of the re-
venue was that the assessee was operating on a wide field in more than
one country for obtaining its stock-in-trade in timber. The fresh con-
tracts entered into by the assessee (15 at the material time which _:;.•
commenced and expired at different times, were contracts entered in
the course of its business. It was, therefore, submitted that these were
C trading contracts. The assessee's right under the contract of 1925,
according to Shri Ahuja, was to (i) fell teak trees. The assessee was
trading in teak; (ii) convert them into logs; and (iii) remove them on
payment of royalty.

0 Under clause 27 of the Agreement, the assessee had no interest
in land as such, it had only a right to collect and take away logs, its
stock-in-trade, it could not fell any fresh trees. The agreement dated
10th June, 1949 was entered into by the assessee, according to the
learned'counsel for the revenue, in the course of its business. He further
submitted that 28,847 logs received by the assessee under the agree-
...
E ment dated 10th June, 1949, were in substitution of the logs that it had
already cut and had not been able to remove from the forests. It was
urged, it was merely a recompense for its rights in the stock-in-trade.

It has to be borne in mind that though the assessee had several
sources of income including income from business operation, the as-
F sessee's company's main income was from felling the trees and carried
on the said business on an extensive scale.
•
On behalf of the assessee, it was submitted that forest leases
constituted the income producing assets of the company. Mr. Kaka
submitted that these involved the setting up of the entire business and
G investment of large funds in building dams, canals, roads, railways,
buildings, etc. He drew our attention to clause 15 of the lease agree-
ment which has been set out at page 40 of the Paper Book in Statement
of case. Mr. Kaka further reiterated that the leases were for a long
duration with a first right to refusal to any subsequent leases. Refer-
ence was made in this connection to clause 4(2) of the lease agreement
H appearing at page 30 of the Paper Book. The Forest leases, it was
C.l.T. v. BURMAH TRADING CORPN. IMUKHARJ!, J. I 285

urged by him, were not ordinary commercial contracts made in the A
course of carrying on their trade or for the disposal of their products.
These leases related to the whole structure of the assessee's profit
making apparatus. It was further submitted that these regulated the
assessee's activities, defined what they might or might not do and
affected the whole conduct of the assessee's business. According to B
him the forest leases, therefore, constituted the capital assets of the
assessee's business. He relied on a decision in Van-Den Berghs Ltd. v.
Clark,3 I.T.N.. 17 at 25 and also Hood Bars v. Commissioner of Inland
Revenue No. 2, 87 Tax Cases, 188.

Shri Kaka, therefore, submitted that the rights acquired under
the contract were three-folds viz. (I) to fell trees (2) to convert the c
felled trees into logs and (3) to remove the logs. He referred us to
clause 1 of the lease Agreement which appears at page 27 of the Paper
Book. Detailed provisions were made in clauses 9, 10 and 11 regarding
each of these operations.
D
It was further submitted that during the initial period of 15 years
the assessee had the right to carry on all the three operations while
u tier the residual rights the assessee could only carry on the opera-

•
t1.,hs of logging and removal of logs already felled by him .

Under clause 27, the assessee had no rights in the felled logs but E
only had the right to log and remove them and acquire the same after
payment of royalty. It was his submissions that in the absence of clause
27 the assessee would have no right to the felled trees which would
have remained the property of the Government of Burma. We are of
the opinion that he is right. It was further submitted that the assessee
had not rights to felled trees which were not logged and removed within F
3 years according to the terms of clause 27 of the lease agreement.

The consideration for the 43,860 tons of logs agreed to be
handed over to the assessee was the surrender to the residuary rights
under the Forest leases and the acquisition of the assets pertaining to
the Forest Leases. He referred to us in this connection to clause 1 of G
the Take Over Agreement which has been set out at page 80 of the
Paper Book.

\ Mr. Kaka further submi•ted that one lump sum wnsideration
was paid for both the surrender of the residuary rights and acquisition
of assets of the business under clause 7 of the Take Over Agreement at H
286 SUPREME COURT REPORTS [1986] 3 S.C.R.

A p. 82. The spliting up of the consideration, according to him, in clause 10
was merely for the implementation of the agreement as Schedule pro-
vided in the manner of handing over the logs to the assessee in exchange
of certain assets. If the residuary rights and assets had not been acquired
by the Government the assessee would have carried on his business for
another 3 years and logged and removed the felled trees. The assessee
B
was prevented from carrying on this business upon the nationalisation of
the forest resources and the consequential acquisition of the residuary
rights and assets pertaining to the forest leases belonging to the assessee.
Mr. Kaka urged that compensation therefore paid for acquisition of the
residuary rights and assets was for the sterilization of the Company's
business and therefore a capital receipt. He relied on the observations of
c Lord Buckmaster at page 463 and Lord Wrenbury at page 465 in
Glenburg Union Fireclay Co. Ltd. v. The Commissioner of Inland
Revenue, 12 Tax Cases 427. It was further urged that once it was held that
the forest leases constituted the capital assets of the assessee, compensa-
tion paid for the sterilization of even part of a capital asset must be
regarded as a capital reo!ipt. Furthermore, according to him, it made no
D
difference whether there was a sale of an asset out and out or it was a
means of preventing th<! acquisition of profits that would otherwise be
gained. He urged that in either case the asset of the company was steri-
lized or destroyed. Reliance was placed on the observations of this Court
in Commissioner of Income Taxv. VazirSuJtan & Sons, 36 I.T.R. 175 at
191 and Godrej & Co. v . Commissioner of Income-Tax, 37 I.T.R. 381.
E
It is, therefore, necessary as mentioned hereinbefore to examine
whether the acquisition of forest leases by assessee were acquisitions
of capital assets. Though we will refer to some of the decisions to
which our attention was drawn and which were referred to by the
High Court, it is well to bear in mind the basic principles. These are: if
F
there was any capital asset, and if there was any payment made for the
acquisition of that capital asset, such payment would amount to a
capital payment in the hand of the payee. Secondly, if any payment -
"

was made for sterilization of the very source of profit making
apparatus of the assessee, or a capital asset, then that would also
G amount to a capital receipt in the hand of the recipient. On the other
hand if forest leases were merely stock-in-trade and payments were
made for taking over the stock-in-trade, then no question of capital
receipt comes. The sum would represent payments of revenue nature
or trading receipts. Whether in a paticular case, for the contracts of the
type with which we are concerned, payments were capital receipts or
H not would depend upon the facts and circumstances of the case. In this
C.I.T. v. BURMAH TRADING CORPN. [MUKHARJI,J.J 287

connection it is important to bear in mind that normally in trade there A
are two types of capital, one circulating capital and the other fixed
capital. Fixed capital is what the owner turns to profit by keeping it in
his own possession; circulating capital is what he makes profit of by
parting with it and letting it change hands. Therefore, circulating capi-
tal is capital which is turned over and in the process being turned over, B
yields profits or loss. It is well-settled as the High Court observed in
the judgment under appeal that what is capital assets in the hands of
one person may be trading assets in the hands of the other. The de-
termining factor is the nature of the trade in which the asset was
employed. Compensation received for immobilisation, sterilization,
destruction or loss, total or partial of a capital asset would be capital
receipt. If a sum represented profit in a new form then that was income c
but where the agreement related to the structure of assessee's profit-
making apparatus and affect the conduct of the business, the sums
received for cancellation or variation of such agreement would be
capital receipt.
D
In Senairam Doongarmall v. Commissioner of Income-tax,
Assam, 42 I.T.R. 392 at 406, this Court observed as follows after
discussing several authorities:

· "All these cases were decided again on their special facts.
Though they involved examination of other decisions in E
search for the true principles, it cannot be said that they
resulted in the discovery of any principle of universal appli-
cation. To summarise them: South India Pictures' case (29
I.T.R. 910) was so decided because the money received
was held to be in lieu of commission which would have
been earned by the business which was still going, and the F
receipt was treated as the fruit of the business. The same
reason was given in Jairam Valiji's case (35 I.T.R. 148),
and the Shamsher Printing Press case (39 I.T.R. 90). In
Vazir Sultan's case (36, I.T.R. 175), the compensation was
held to replace loss of capital, and in Godrej's case (37
I.T.R. 381), the compensation was said not to have any G
relation to the likely income or profits but to loss of capital.
Each case was thus decided on its facts.

We have so far shown the true ratio of each case cited
before us, and have tried to demonstrate that these cases
do no more than stimulate the mind, but none can serve as a H
288 SUPREME COURT REPORTS 11986] 3 S.C.R.

A precedent, without advertence to its facts. The natme of
the business, or the nature of the outlay or the nature of the
receipt in each ca:>e was the decisive factor, or there was a
combination of these factors. Each is thus an authority in
the setting of its own facts."
B
All these cases have been discussed in the judgment under ap-
peal at page 795 of 811.T.R. As Hidayatullah, J. as the Chief Justice
then was observed in 42 I.T.R. at page 392, each case depended upon
the facts of each case.

This Court had occasion to consider some of these aspects in
C Commissioner of Income-tax, U.P. v. Gangadhar Baiinath, 86 I.T.R.
19 whereas at page 25 of report referring to several authorities it
noted:

"The question whether a receipt in capital or income has
frequently come up for deten.nination before the courts.
D
Various rules have been enunciated as furnishing a key to
the solution of the question, but as often observed by the

E
highest authorities, it is not possible to lay down any single
test as infallible or any single criterion as decisive in !lie
determination of the question, which must ultimately de-
pend on the facts of the particular case, and the authorities
bearing on the question are valuable only as indicating the
-
matters that have to be taken into account in reaching a
decision: vide Van Den Berghs Ltd. v. Clark (1935 A.C.
431'. 19 T.C. 390: 3 l.T.R. (Eng. Case) 17 (H.L.). That,
however, is not to say that the question is one of fact, for,
as observed in Davies (H.M. Inspector of Taxes) v. Shell
F
Company of China Ltd. (32 T .C. 133; 22 I.T .R. (suppl.) 1
(C.A.), 'these questions between capital and income, trad-
ing profit or no trading profit, are questions which, though
they may depend no doubt to a very great extent on the
particular facts of each case, do involve a conclusion of law
G
to be drawn from thos" facts'."

Similar observations were made in Commissioner of Income-tax,
Poona v. Manna Ramji and Co., 86 I. T .R. 29. The Court reiterated t
the same principle.

H We have referred to the discussion which took place with the
C.l.T. v. BURMAH TRADING CORPN. [MUKHARJI, J.l 289

Government of Burma on 28th October, 1925. Having regard to all A
·~
these, the forest leases, in our opinion, affected the very structure of
the operation of the assessee. In this connection we may remind
ourselves of the decision of the House of Lords in Van Den Berghs
Ltd. v. Clark (H.M. Inspector of Taxes), 3 I.T.R. 17 (English case). In
that case a Dutch company and the assessee who were competitors in B
the manufacture and dealing in margarine, in order to end the compe-
tition entered into an agreement in 1908, by which they bound them-
~ selves to work in friendly alliance and to share their profits and losses
,... in accordance with an elaborate scheme therein specified; further, it
was stated that they would promote the commercial, pecuniary, buying
and selling and other interests of the two companies. In 1913 another
agreement was entered into modifying the original basis of ascertain- c
ing and sharing profits, and, subject thereto, continued in force the
provisions of the agreement of 1908 until December, 1940. During the
~- war the agreements were not operated, but in 1920 a third agreement
was made modifying the two previous agreements as to the basis of
profit-sharing, extending the branches of the business, and again con- D
tinuing the principal agreement of 1908 till December, 1940. In 1927,
three agreemerits were made, under which the appellant:s agreed to
determine the agreements of 1908, 1913 and 1920 in consideration of
the payments to them of£ 450,000. The Special Commissioners held
that that sum was paid in respect of the pooling agreements, and must be
~. brought in for the purposes of ariving at the balance of the profits of E
the appellants for the year ending December, 1927, and consequently
that the sum was an income receipt. Finlay, J., held that the cancelled
agreements were capital asset of the appellants and that the sum of£
450,000 was not an income receipt at all. The Court of Appeal restored
the decision of the Commissioners, who had held that the sum was not
received by the appellants in consideration of the surrender of a fixed F
capital asset, but arose from a transaction attributable to circulating
"' capital, and therefore an income receipt. By the House of Lords it was
held that£ 450,000 was not an item of profit arising to the appellants
from the carrying on of their trade, as the agreements which were
cancelled were not ordinary commercial contracts made in the course
of trading nor merely agreements as to how trading profits should be G
distributed, but affected the whole conduct of their business. It was
held that money laid out in the cancellation of so fundamental an
{ organisation of a trader's activities could not be regarded as an income
receipt of disbursement. The agreements formed the fixed framework
within which their circulating capital operated, and were not incidental
to the working of their profit-making machine. The Court reiterated H
290 SUPREME COURT REPORTS 11986] 3 S.C.R.

A the obseivations and principles laid down by Lord Cave in British
Insulated & Helsby Cables Ltd. v. Atherton, 11926] A.C. 205. The
observations of Lord Macmillan at page 25 of 3 I.T.R. (English case)
are apposite to the facts before us. The three agreements which the
appellants in that case had consented to cancel were not ordinary
B commercial contracts made in the course of carrying on their trade;
they were not contracts for the disposal of their products or for the
engagement of agents or other employees necessary for the conduct of
their business. These regulated the appellant's activities, defined what
the appellants might and what might not do and affected the whole
conduct of the appellant's business. Accordingly, Lord Macmillan
..,
.
I
found it in that case, difficult in seeing how money laid out to secure,
c or money received for the cancellation of, so fundamental an organisa-
tion of a trader's activities could be regarded as an income disburse-
ment or an income receipt. Lord Macmillan noted that the legal
character of the payment should not be mis-judged by the magnitude
of payment-for the magnitude is a relative term. But the magnitude
D of a transaction is not an entirely irrelevant consideration. With
respect we accept this approach of Lord Macmillan to the facts of the
present case before us, which appears to be basically similar.

The forest lease therefore constituted, in our opinion, capital
assets of the assessee. The same conclusion is fortified by the observa-
E tions of House of Lords in the case of Hood Barrs v. Commissioner of
Inland Revenue (No. 2), 37 Tax Cases 188.

In Commissioner of Income-tax, Hyderabad-Deccan v. Vazir
Sultan & Sons, 36 I.T.R. 175, this Court held that in considering
whether compensation paid to an agent on the cancellation of his
F agency was a capital receipt or a revenue receipt, the first question
considered was whether the agency agreement in question was a capi-
tal asset of the assessee's business and constituted its profit making
apparatus and was in the nature of its fixed capital, or it was a trading
asset or circulating capital or stock-in-trade of its business. If it was the
former compensation received would be a capital receipt, if the agency
G was entered into by the assessee in the ordinary course of his business
and for the purpose of carrying on that business it would fall into the
latter category and the compensation received would be a revenue
receipt.

Having regard to the nature of the forest Jeas~s which we have
H discussed before, in our opinion, the payments made for cancellation
C.l.T. v. BURMAH TRADING CORPN. [MUKHARJI, J.] 291

or sterilisation of the rights under these leases would be capital re- A
~ ceipts. See in this connection the observations of Lord Buckmaster in
the decision of House of Lords in The Glenboig Union Fireclay Co.
Ltd. v. The Commissioner of Inland Revenue (supra). The observa-
tions of Lord Wren bury are at page 465.
B
We have ·discussed the facts regarding the cancellation and
circumstances under which it was entered, and we may refer to the
-1 facts stated in the judgment of the High Court at pages 798-799. As a
result of the above findings the High Court came to the conclusion that
~- sum of Rs.65,52, 153 mentioned in question No. 2 for the assessment
I year 1950-51 and the sum of Rs.5, 18,896 mentioned in question No. 2
for the assessment year 1951-52 were related to the 28, 847 tons of logs c
which are exempt from tax as being receipt of a capital nature on the
background of the facts found by the High Court. Question No. 3
really does not arise because for levy of a balancing charge under
~ section 10(2)(vii) of Income-tax Act, 1922, it is absolutely necessary
that the depreciable assets should have been sold at a price agreed to D
between the parties. See in this connection also the observations of
this Court in Commissioner of Income-tax v. Motors & General Stores
(P) Ltd., 66 I.T.R. 692. But in exchange there is a reciprocal transfer of
interest in movable property, a corresponding transfer of interest in
another movable property which is often denoted as 'barter'. The
4 agreement of 10th June, 1949 had resulted from the enforcement of the
Government's policy of nationalisation of forest operation and the
E

agreement does not involve any transaction of sak between the as-
sessee and the Union of Burma. The assessee company never paid any
money by a price in respect of assets delivered to it by the Govern-
ment, therefore, this amount of Rs.l,41,156 could not be brought to
tax against the assessee company under the second proviso to section F
10(2)(vii) of the Indian Income-tax Act, 1922. The question accord-
~:
ingly was rightly decided in favour of the assessee.

Regarding question No. 4 in the assessment year 1950-51 and the
question No. 3 in the assessment year 1951-52, these related to the
delivery of 2,946 and 12,067 tons of logs to the assessee-company in G
respect of the depreciable assets, stores and livestock mentioned in
sub-clause (b) of clause 1 of the agreement dated 10th June, 1949. The
High Court was right in holding that logs came into possession of the
{ assessee company in consequence of the agreement made on !0th
June, 1949 against delivery of all outstanding or residuary rights of the
assets to the Government. The arrangement was in consequence of H
292 SUPREME COURT REPORTS [1986] 3 S.C.R.
A nationalisation of forest operations in Burma. The whole of the quantity
of 43,860 tons of logs delivered to the assessee-company was in lieu of
the asset of the forest leases and the other diverse assets which were
handed over by the assessee-company to the Government on 10th June,
1949. These logs were not received by the assessee-company on re-
B venue account at all. The fact that the assessee-company did not mix
up these logs with any of the stock-in-trade held by it in its ordinary
course of business is an indication of the fact that the assessee did
receive these as stock-in-trade. These logs were received by the
assessee-company for four years and held by it in the account which is
described as 'Burma forest assets realisation reserve account'. The sale
proceeds of these logs could not be held to have been received by the
iI
c assessee-company on revenue account. The High Court was right. The
question No. 4 in the first year and the question No. 3 in the second
year must be answered in the negative and against the revenue.

We have set out hereinbefore the questions relating to assess-
D ment year 1953-54. It appears from the facts that nothing was paid by
the Government to the assessce-company in connection with 1/3 area
of the forest areas which the Government had taken over from the
assessee-company on 1st June, 1948. The assessee-company had filed a
suit against the Government in connection with the timber logs and
stores taken over by the Government on 1st June, 1948. The facts in
E connection with the delivery of these goods appeared in the letter of
the Government to the assessee-company dated 24th January, 1948. In
the suit filed by it, the asessee-company succeeded in obtaining a
decree for Rs.5,58, 188. The Tribunal held that the timber taken over
by the Government in respect of 1/3rd area was stock-in-trade and the
proceeds were taxable. Mr. Kaka was right in his submission that the
F timber taken over was towards the residuary rights in respect of the
assets lying within 1/3rd area taken over on 1st June, 1948. The price of
the timber as such was never paid by the Government. In the decree,
this sum was awarded in lieu of the rights which the assessee-company
had under clause 27 in respect of I/3rd area taken over by the Govern-
ment. To these facts, the terms of the agreement dated 10th June, 1949
G would be applicable. This sum cannot therefore be taxed.

On the question No. 2 for the assessment year 1953-54 no argu-
ment was advanced before the High Court on behalf of the assessee
and the High Court answered the question in the affinnative.

H
C.l.T. v. BURMAH TRADING CORPN. [MUKHARJI, J.) 293
A
In view of the principles involved and the nature of the transac-
tions, we are of the opinion that the High Court was right in answering
the question in the manner it did. In the premises these -appeals fail
and are dismissed with costs.

B
P.S.S. Appeals dismissed.
~\

{