C.I.T. BOMBAY CITY versus BOMBAY BURMAH TRADING CORPORATION, BOMBAY

Citation: [1986] 3 S.C.R. 269 · Decided: 16-07-1986 · Supreme Court of India · Bench: SABYASACHI MUKHERJI · Disposal: Dismissed

Judgment (excerpt)

C.I.T. BOMBAY CITY 
v. 
A 
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 
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. 
c 
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 
A 
B 
c 
D 
E 
F 
G 
270 
SUPREME COURT REPORTS 
[1986] 3 S.C.R. 
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 
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. 
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 
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 
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-
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 a

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