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Civil Appeal Nos. 1 of 1974 and 1355 1356 of 1973.
273 From the Judgment and Order dated 22/24.4.1970 of the Bombay High Court in I.T.R. No 111 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 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 22nd/24th April, 1970.
These are by certificate granted by the High Court under section 66A(ii) of the Indian Income tax Act, 1922.
The judgment under appeal is reported in 81 I.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 arising out of the assessment to income tax for the assessment years 1950 51, 1951 52 and 1953 54, the accounting years respectively ending on 31st May, 1950,31st May, 1951 and 31st May, 1953.
The assessee is a public limited company limited by shares.
It derived income from several sources including certain business operations.
These operations were carried out in India and abroad and used to be carried out, inter 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 Government of Burma.
In the year of account ending on 31st May, 1950 the assesseecompany 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 assesseecompany 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 274 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 renewed 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 expired, the Second World War started and the Japanese army overran 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 settlement of the new forest leases to be executed between these business organisations and the Government.
Upon termination of the hostilities, in connection with the resumption of the forest operations, the Government made provisional arrangements in terms of what is referred to in paragraph 7 of the statement of the case as "weight agreement".
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 European companies who were exploiting forests in Burma under the various 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 1st June, 1948, a third of the total teak area mentioned in the 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 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 assesseecompany 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 275 of all the assets pertaining to the forest leases, viz., headquarters, 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 Government of Burma the assessee company of 50,000 tons of teak logs of the specified qualities mentioned in clause 7 of the said agreement.
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: (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, 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 Government was maintained by the assessee company in what is described 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 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 incurred costs for getting delivery of these logs at the rate of Rs.225 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 276 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, stores and livestock.
For the accounting year ending 31st May, 1951, the Income tax Officer held that the assessee had received in all 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.) 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 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 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 logs was received only in respect of the said sterilization or loss of the capital asset.
In connection with that submission, the Appellate Tribunal held against the assessee company that the assessee 's business had not stopped and there was no question of sterilization of its business.
The forest leases owned by the assessee company had expired and were not bound to be renewed and the "residuary rights" available 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.
The Tribunal, however, observed that though the agreement referred to certain residuary rights under clause 27 of the agreement 277 there was nothing to show that any compensation was paid in respect 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 logs received against depreciable assets, stores and livestock were profits 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 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 assessment 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: "I. Assessment year 1950 51: . . 2.
Whether, on the facts and in the circumstances of the 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, 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 received in respect of depreciable assets, stores and livestock, respectively, were liable to tax under the Act?" "II.
Assessment year 1951 52: 1. . . . . . . 278 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 case, 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, respectively, were liable to tax under the Act?" Similarly for the assessment year 1953 54, the questions referred by the Tribunal to the High Court were as follows: "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? 2.
Whether, on the facts and in the circumstances of the case, the amount of Rs.9,493, being the amount of compensation 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 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 negative, for the assessment year 1951 52 the second 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.
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 of forests at the relevant time.
The agreements were entered into at different times and provided for expiry of leases on different 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: General rights "1.
The Contractor shall within the series of of contractor: coupes into which the forest area described in Schedule I and hereinafter 279 referred to as "the Concession Area" shall be subdivided as provided in clause 5 and during the periods for extraction there from prescribed in clause 6 and subject to such further conditions, limitations and restrictions as are hereinafter prescribed have the sole right and license to (a) fell the teak trees gridled or marked in that behalf 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) remove all such logs and all logs were left unextracted from former operations: PROVIDED that is any area to which a scheme for concentrated exploitation accordance 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.
Grant of other 2.
The Government acting on behalf of the rights in Con Secretary of State reserves to itself the cession Area.
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 the whole or from any part of the Concession Area.
" The proviso to that clause need not be set out.
Clause 4(1) was as follows: Period during 4.
(1) This Agreement shall come into force which Agreementon the 1st day of January, 1926 and shall is in force unless previously terminated under clause 26 or clause 29 terminated after the expiry of a period of fifteen years; viz. on the 31st day of December, 1940; PROVIDED that in respect of the rights conferred by 280 clause 27 or by sub clause (2) of this clause and in respect of very liability incurred under this Agreement it shall continue in force for such further period as is necessary for the enjoyment of such rights and the enforcement of such liabilities.
" 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.
Other relevant clauses were, General respo 19.
Nothing herein contained shall be deemed nsibilities to relieve the Contractor, his agents and of Contractor.
servants of the duty of complying with any Act of the legislature and of the rules thereunder at the time being in force and applying to the Concession Area.
With thirty days from the dates respectively on which measurement statements of timber have been furnished to 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: . . . . . . . . . . . . . . . .
Clause 21 read as follows: Marking of 21.
The Contractor shall be entitled to have timber after the timber which has been measured for Measurement royalty marked at the time of 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 property of the Contractor.
" Clause 23 was as follows: "23.
Until teak timber has been marked and royalties have 281 Teak timber been paid thereon in accordance with the Goverment pro preceding clause it shall be deemed to be perty up to property of the Government and the the payment Contractor shall have no right to sell of royalty.
mortgage or hypothecate it or create any charge or lien thereon.
" Clause 27 of the agreement provides as follows: "27.
On the conclusion of the period specified in clause 4 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 removing 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 completed before the date such conclusion or termination and on 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 concession area under any new agreement whether with the present contractor or with other parties subsequent to this agreement or in the event of no new agreement being entered 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 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 the agreement at any time by giving two years notice in writing.
On the 1st January, 1926, there was commencement of the agreement.
31st December, 1940 was the due date of expiry of the agreement.
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 to resume forest operations and for such further period as might be required for settlement of new agreements.
On 24th January, 1948, 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 of Burma on the other hand for exploitation of forests.
On 4th February, 1948, there was the assessee 's letter 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 agreements.
on 10th February, 1948, the Burmese Government replied to the 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 expired on 1st May, 1947.
Government 's decision to terminate long term pending lease negotiations and to terminate on 31st May, 1948 joint operations in the area intended to be taken over by Government and the Government 's intention 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 the assessee and Steel Bros., inter alia, dealing with the residuary rights under clause 27 of the 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 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.
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 between the Government of Burma and the assessee company.
The said discussion recorded is as follows: 283 "The Government of Burma was always the grantor.
Apparently 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.
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 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 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 including dwelling houses and buildings.
It had to maintain diverse sorts of mechanical appliances and had, inter alia, owned motor transport, tractors, launches, elephants, cattle 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 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 R.S. 1,41,156 for the assessment year 1950 51 284 and for 1951 52 whether the amounts of R.S. 44,407, R.S. 8,639 and R.S. 2,16,929.
being the excess realisations over R.S. 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 assessment year 1953 54 will be dealt with separately.
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 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.
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 agreement 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 assessee '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 investment of large funds in building dams, canals, roads, railways, buildings, etc.
He drew our attention to clause 15 of the lease agreement 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.
Reference was made in this connection to clause 4(2) of the lease agreement appearing at page 30 of the Paper Book.
The Forest leases.
it was 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 him the forest leases, therefore, constituted the capital assets of the assessee 's business.
He relied on a decision in Van Den Berghs Ltd. vs Clark, at 25 and also Hood Bars vs 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. (1) to fell trees (2) to convert the 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.
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 under the residual rights the assessee could only carry on the operations of logging and removal of logs already felled by him.
Under clause 27, the assessee had no rights in the felled logs but 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 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 the Take over Agreement which has been set out at page 80 of the Paper Book.
Mr. Kaka further submitted that one lump sum consideration 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 p. 82.
The splitting up of the consideration, according to him, in clause 10 was merely for the implementation of the agreement as Schedule provided 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 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 Lord Buckmaster at page 463 and Lord Wrenbury at page 465 in Glenburg Union Fireclay Co. Ltd. vs 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, compensation paid for the sterilization of even part of a capital asset must be regarded as a capital receipt.
Furthermore, according to him, it made no difference whether there was a sale of an asset out and out or it was a means of preventing the acquisition of profits that would otherwise be gained.
He urged that in either case the asset of the company was sterilized or destroyed.
Reliance was placed on the observations of this Court in Commissioner of Income Tax vs Vazir Sultan & Sons, at 191 and Godrej & Co. vs Commissioner of Income Tax, 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 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 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 particular case, for the contracts of the type with which we are concerned, payments were capital receipts or not would depend upon the facts and circumstances of the case.
In this 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 capital is capital which is turned over and in the process being turned over, 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 determining 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 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.
In Senairam Doongarmall vs Commissioner of Income lax, Assam, 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 search for the true principles, it cannot be said that they resulted in the discovery of any principle of universal application.
To summarise them: South India Pictures ' case 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 receipt was treated as the fruit of the business.
The same reason was given in Jairam Valiji 's case , and the Shamsher Printing Press case In Vazir Sultan 's case (36, I.T.R. 175), the compensation was held to replace loss of capital, and in Godrej 's case , the compensation was said not to have any 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 precedent, without advertence to its facts.
The nature of the business, or the nature of the outlay or the nature of the receipt in each case was the decisive factor, or there was a combination of these factors.
Each is thus an authority in the setting of its own facts.
" All these cases have been discussed in the judgment under ap peal at page 795 of 81 I.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 Commissioner of Income tax, U.P. vs Gangadhar Baijnath, 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 determination before the courts.
Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend 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. vs Clark ; 3 I.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) vs Shell Company of China Ltd. ; 22 I.T.R. (suppl.) 1 (C.A.), 'these questions between capital and income, trading 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 to be drawn from those facts '.
" Similar observations were made in Commissioner of Income tax, Poona vs Manna Ramji and Co., The Court reiterated the same principle.
We have referred to the discussion which took place with the 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. vs Clark (H.M. Inspector of Taxes), case).
In that case a Dutch company and the assessee who were competitors in the manufacture and dealing in margarine, in order to end the competition entered into an agreement in 1908, by which they bound themselves 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 ascertaining 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 continuing the principal agreement of 1908 till December, 1940.
In 1927, three agreements were made, under which the appellants 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 arriving at the balance of the profits of 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 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 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 the observations and principles laid down by Lord Cave in British Insulated & Helsby Cables Ltd. vs Atherton, 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 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 found it in that case, difficult in seeing how money laid out to secure, I or money received for the cancellation of, so fundamental an organisation of a trader 's activities could be regarded as an income disbursement 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 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 observations of House of Lords in the case of Hood Barrs vs Commissioner of Inland Revenue (No. 2), 37 Tax Cases l 88.
In Commissioner of Income tax, Hyderabad Deccan vs Vazir Sultan & Sons, , this Court held that in considering whether compensation paid to an agent on the cancellation of his agency was a capital receipt or a revenue receipt, the first question considered was whether the agency agreement in question was a capital 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 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 leases which we have discussed before, in our opinion, the payments made for cancellation 291 Or sterilisation of the rights under these leases would be capital receipts.
See in this connection the observations of Lord Buckmaster in the decision of House of Lords in The Glenboig Union Fireclay Co. Ltd. vs The Commissioner of Inland Revenue (supra).
The observations of Lord Wrenbury are at page 465.
We have discussed the facts regarding the cancellation and circumstances under which it was entered, and we may refer to the 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 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 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 between the parties.
See in this connection also the observations of this Court in Commissioner of Income tax vs Motors & General Stores (P) Ltd., 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 agreement of 10th June, 1949 had resulted from the enforcement of the Government 's policy of nationalisation of forest operation and the agreement does not involve any transaction of sale between the assessee and the Union of Burma.
The assessee company never paid any money by a price in respect of assets delivered to it by the Government, therefore, this amount of Rs.1,41,156 could not be brought to tax against the assessee company under the second proviso to section 10(2)(vii) of the Indian Income tax Act, 1922.
The question accordingly 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 195l 52, these related to the delivery of 2,946 and 12,067 tons of logs to the assessee company in 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 10th June, 1949 against delivery of all outstanding or residuary rights of the assets to the Government.
The arrangement was in consequence of 292 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 revenue 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 assessee company on revenue account.
The High Court was right.
T he 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 assessment year 1953 54.
It appears from the facts that nothing was paid by the Government to the assessee 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 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 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 1/3rd area taken over by the Government.
To these facts, the terms of the agreement dated 10th June, 1949 would be applicable.
This sum cannot therefore be taxed.
On the question No. 2 for the assessment year 1953 54 no argument was advanced before the High Court on behalf of the assessee and the High Court answered the question in the affirmative.
293 In view of the principles involved and the nature of the transactions, 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.
P.S.S. Appeals dismissed.

Output:
The assessee Company, carrying on business of selling timber in 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 period of 15 years to remove the logs 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 Ist January 1926 and 31st December, 1940 was the due date of expiry.
However, before the expiry of the period, the Second World War started and the Government 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 10, 1949.
In terms of an agreement dated 10th June, 1949 between the parties the assessee made 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 logs in substitution of non duty paid logs, 2,946 tons against depreciable assets and stores and 12,067 tons against livestock.
The logs so received by the assessee com 270 pany were sold off by it from time to time in the accounting years 1949, 1950, 1951 and 1952.
The Income tax Officer 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 receipt of capital nature, and (ii) whether the sale proceeds in respect of logs received in lieu of depreciable 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 section 66A(2) of the Income tax Act, 1922 it was contended 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 agreements the assessee had no interest in land as such, it had only a right to collect and take 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 recompense for its rights 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 section 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, railways, buildings etc., that the forest leases 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 acquisition of assets of the business under the take over agreement, that the assessee was prevented from carrying on business upon the nationalisation of forest resources and acquisition of residuary rights and assets pertaining to the forest leases.
It was further submitted that the compensation paid to the assessee was the sterilisation of the company 's business and thus a capital receipt, not subject to tax.
Dismissing the appeals, the Court, 271 ^ HELD: 1.1.
The forest leases constituted capital assets of the assessee.
The payments made for cancellation or sterilization of the rights under these leases were, therefore, capital receipts 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 principles are: if there was any capital asset and if there was any payment made for acuisition of that capital asset, such payment 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 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.
Compensation received for immobilisation, sterilization, destruction or loss, total or partial, of a capital asset would, therefore, be capital receipt.
If a sum represented profit in a new form then that would be income but where the agreement related to the structure of assessee 's profit making apparatus and affected the conduct of business, 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 the operation of the assessee.
The compensation received for the cancellation of assessee Company 's activities could not be regarded as an income receipt, nor the legal character of the payment misjudged by the magnitude of the payment.
[289A; 290C D] Glenboig Union Fireclay Co. Ltd. vs The Commissioner of Inland Revenue, 12 Tax Cases 427; Senairam Doongarmall vs Commissioner of Income tax, Assam, at 406; Commissioner of Income tax, U.P. vs Gangadhar Baijnath, ; Commissioner of Income tax, Poona vs Manna Ramji and Co., ; Van Den Berghs Ltd. vs Clark (H.M. Inspector of Taxes), case): British Insulated & Helsby Cables Ltd. vs Atherton, ; Hood Barrs vs Commissioners of Inland Revenue (No.2), 37 Tax Cases 188; Commissioner of Income tax, Hyderabad Deccan vs Vazir Sultan & Sons, , referred to.
For levy of a balancing charge under section 10(2)(vii) of the Income tax Act, 1922 it was absolutely necessary that the depreciable 272 assets should have been sold at a price agreed to between the parties.
The agreement under which the assessee company received logs by way of compensation in lieu of depreciable assets did not involve any transaction 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 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 section 10(2)(vii) of the Income tax Act, 1922.
[29 ID F] Commissioner of Income tax vs Motors & General Stores (P) Ltd., , referred to.
The logs delivered to the assessee company in respect of the depreciable assets, stores and livestock came into possession of the assessee in consequence of the agreement against surrender of all outstanding or residuary rights of the assessee to the Government.
The arrangement was in consequence of nationalisation of forest operations.
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 logs could not, therefore, be held to have been received by the assessee company on revenue account.
Consequently, the excess realisation received over the cost incurred in getting delivery of these logs was not liable to tax under the Act.
[29 IG H; 292A C] 4.
Nothing was paid by the Government to the assessee company in connection with 1/3rd 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 of the rights which the assessee company had under cl. 27 of the agreement could not, therefore, be taxed.
[292F G] 5.
Normally in trade, there are two types of capital, one circulating 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 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.
[287A C]


Input:
Appeal No. 21 of 1960.
Appeal from the judgment and order dated January 16, 1959, of the Madras High Court in Writ Appeal No. 67 of 1958, arising out of the judgment and order dated July 15, 1958, of the said High Court in Writ Petn.
No. 922 of 1957.
C. B. Aggarwala, section N. Andley, J. B. Dadachanji and Rameshwar Nath, for the appellant.
R. Ganapathy Iyer, H. J. Umrigar, R. H. Dhebar and T. M. Sen, for respondent No. 2. 1960.
May 4.
The Judgment of the Court was delivered by WANCHOO, J.
This is an appeal on a certificate granted by the Madras High Court.
The appellant Company had been carrying on various classes of insurance business other than life insurance after its incorporation in September, 1941.
On October 15, 1956, an extraordinary general meeting of the shareholders of the Company passed a resolution by which all its insurance business was to cease forthwith and no further policies of insurance of any kind were to be issued thereafter.
It was also resolved that no application should be made for renewal of the certificate granted under section 3 of the , No. IV of 1938 (hereinafter called the Act), and that thence forward the Company should only carry on the business of money lending as a loan Company and also to do investment business.
In consequence of these resolu tions, the Company informed the Controller of Insurance in December, 1956, that it was not applying for renewal of its registration for carrying on the business of insurance.
In May, 1957, the Controller wrote to the Company that its certificates for carrying on insurance business would be deemed to be cancelled from July 1, 1957, and the cancellation was notified in the Gazette of India.
It appears that the Government of India had been receiving complaints against the Company.
Consequently on July 17, 1957, the Government of India passed an order under section 33 of the Act directing the Controller of Insurance to investigate the affairs of the Company and to submit a report.
Thereupon the Controller appointed Messrs. Fraser and Ross to act as auditors to assist him in the investigation.
The Company was informed of this order in September 1957.
Thereupon it wrote to the Controller that no order under section 33 of the Act could be passed 860 against it, as it had closed its business of insurance and the order in question was without jurisdiction.
The Controller sent a reply to this communication and pointed to the provisions of section 2D of the Act in justification of the order.
Thereupon the Company made an application under article 226 of the Constitution in the Madras High Court.
Two main contentions were raised by it in the petition.
In the first place it was submitted that the Company having closed all its insurance business no order could be passed against it under section 33.
as that section only applied to companies actually carrying on the business of insurance and that in any case no such order could be passed even with the help of section 2D of the Act.
In the second place it was contended that even if such an order could be passed under section 33 read with section 2D of the Act, it could not be done in the present case, as the Company 's liabilities in respect of its insurance business did not remain unsatisfied or not otherwise provided for.
Messrs. Fraser and Ross as well as the Controller were made parties to the petition.
The petition was opposed on behalf of the Controller, and his contention was that the case was clearly covered by section 2D of the Act and therefore the order under section 33 was validly passed in this case and that it had not been shown that the liabilities had been satisfied or had been otherwise provided for.
The learned Single Judge held that an order under section 33 read with section 2D could be passed against the Company and that it had not been shown that the Company 's liabilities had been satisfied or otherwise provided for.
He therefore dismissed the writ petition.
This was followed by an appeal by the Company, which was dismissed.
The Division Bench sub stantially agreed with the view taken by the learned Single Judge.
Thereupon the Company applied for a certificate to enable it to appeal to this Court and obtained it; and that is how the matter has come up before us.
Mr. Aggarwala appearing for the Company has urged the same two points before us.
The Act was passed in 1938 to control persons carrying on the business of insurance.
Section 2(9) thereof defines an ' insurer ' inter alia as weaning any body corporate 861 (not being a person specified in sub cl.
(c) of this clause) carrying on the business of insurance, which is a body corporate incorporated under any law for the time being in force in India or stands to any such body corporate in the relation of a subsidiary company within the meaning of the Indian Companies Act, 1913, as defined by sub section
(2) of section 2 of that Act.
Section 3 provides for registration of any person carrying on the business of insurance and no such business can be carried on unless a certificate of registration for the particular class of insurance business has been obtained from the Controller.
Section 3(4) gives power to the Controller to cancel the certificate for reasons specified therein and section 3(5B) lays down that when a registration is cancelled the insurer shall not after the cancellation has taken effect, enter into new contracts of insurance, but all rights and liabilities in respect of contracts of insurance entered into by him before such cancellation takes effect shall, subject to the provisions of sub section
(5D), continue as if the cancellation had not taken place.
In order to safeguard the interest of policy holders, section 7 provides for deposits by the insurer for various classes of his business.
Section 8 lays down that any deposit made under section 7 shall be deemed to be part of the assets of the insurer but shall not be susceptible of any assignment or charge; nor shall it be available for the discharge of any liability other than liabilities arising out of policies of insurance issued by the insurer so long as any such liability remains undischarged ; nor shall it be liable to attachment in execution of any decree except a decree obtained by a policy holder of the insurer in respect of a debt due upon a policy which debt the policy holder has failed to realise in any other way.
Section 9(1) lays down that where an insurer has ceased to carry on in India any class of insurance business in respect of which a deposit has been made under section 7 and his liabilities in India in respect of business of that class have been satisfied or are other.
wise provided for, the court may on the application of the insurer order the return to the insurer of so much of the deposit as does not relate to the classes of insurance.
, if any, which he continues to carry on.
Under 112 862 section 10 an insurer who carries on business of more than one kind is required to keep a separate account of all receipts and payments in respect of each such class of insurance business.
Section 33(1) with which we are directly concerned, is in these terms: " The Central Government may at any time by order in writing direct the controller or any other person specified in the order to investigate the affairs of any insurer and to report to the Central Government on any investigation made by him: Provided that the controller or the other person may, wherever necessary, employ an auditor or actuary or both for the purpose of assisting him in any investigation under this section.
" Section 2D is in these terms: " Every insurer shall be subject to all the provisions of this Act in relation to any class of insurance business so long as his liabilities in India in respect of business of that class remain unsatisfied and not otherwise provided for.
" The contention of Mr. Aggarwala is that section 33 and section 2D both refer to an insurer which is defined in section 2(9) as a person carrying on the business of insurance.
He, therefore, contends that as soon as the insurer who was carrying on the business of insurance closes it down completely be no longer remains an insurer and the provisions of the Act do not apply to him.
Therefore, according to him, when section 33 provides for an order of investigation by the Central Government such an order can only be made in respect of a, person who is actually carrying on the business of insurance and is thus an insurer and cannot be made against a person who was an insurer but has closed his business.
Further, according to Mr. Aggarwala, section 2D also speaks of an insurer and makes him subject to all the provisions of the Act with respect to any class of insurance business so long as his liabilities in respect of that class remain unsatisfied or not other.
wise provided for and therefore section 2D would only apply to those cases where insurance business is being carried on, though some class of insurance business might have been closed.
The contention therefore is that reading sections 33 and 2D together, no order under 863 section 33 can be made in case of an insurer who has completely closed his business of insurance.
The main basis of this contention is the definition of the word "insurer" in section 2(9) of the Act.
It is pointed out that definition begins with the words " insurer means" and is therefore exhaustive.
It may be accepted that generally the word " insurer" has been defined for the purposes of the Act to mean a person or body corporate, etc., which is actually carrying on the business of insurance, i.e., the business of effecting contracts of insurance of whatever kind they might be.
But section 2 begins with the words " in this Act, unless there is anything repugnant in the subject or context " and then come the various definition clauses of which (9) is one.
It is well settled that all statutory definitions or abbreviations must be read subject to the qualification variously expressed in the definition clauses which created them and it may be that even where the definition is exhaustive inasmuch as the word defined is said to mean a certain thing, it is possible for the word to have a somewhat different meaning in different sections of the Act depending upon the subject or the context.
That is why all definitions in statutes generally begin with the qualifying words similar to the words used in the present case, namely, unless there is anything repugnant in the subject or context.
Therefore in finding out the meaning of the word " insurer " in various sections of the Act, the meaning to be ordinarily given to it is that given in the definition clause.
But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context in which the word has been used and that will be giving effect to the opening sentence in the definition section, namely, unless there is anything repugnant in the subject or context.
In view of this qualification, the court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances.
Therefore, though ordinarily the word " insurer " as used in the Act would mean a 864 person or body corporate actually carrying on the business of insurance it may be that in certain sections the word may have a somewhat different meaning.
A perusal of a few sections of the Act will illustrate this and immediately show that the word " insurer " has been used in some sections to mean not merely a person actually carrying on the business of insurance but also a person who intends to carry on the business of insurance but has not actually started it and also a person who was carrying on the business of insurance but has ceased to do so.
For example, section 3(2) which deals with an application for registration which naturally has to be made before the business of insurance actually commences, lays down in cl.
(b) that the application shall be accompanied by the name, address and the occupation, if any, of the directors where the insurer is a company incorporated under the Indian Companies Act.
Here the word ,insurer" has been used to indicate the company which is not actually carrying on the business of insurance but is intending to do so and is applying for registration.
Further in section 3(2) (e) which also deals with an application for registration, it is provided that an insurer having his principal place of business or domicile, outside India shall send along with the application a statement verified by an affidavit of the principal officer of the insurer setting forth various requirements.
Here again, the word " insurer " has been used for an intending insurer, for the business of insurance would only begin after the registration certificate is granted on the application made under section 3(2).
Then in section 9 it is provided that, where an insurer has ceased to carry on business, the court may on the application of the insurer order the return to him of the deposit made under section 7.
shows that though the, insurer is not actually carrying on the business of insurance he is still termed an insurer and on his application the deposit may be refunded to him.
Again section 55 which deals with a situation arising out, of the winding up of an insurance company or the insolvency of any other insurer, provides that the value of the assets and liabilities of the insurer shall be ascertained in such manner and upon such basis as the liquidators 865 or the receiver in insolvency thinks fit.
The word " insurer" has thus been used in this section for a person or body corporate, etc., which is not actually carrying on the business of insurance and has gone into liquidation or ' has become insolvent.
Therefore, though the ordinary meaning to be given to the word "insurer " is as given in the definition clause (section 2(9)) and refers to a person or body corporate, etc., carrying on the business of insurance, the word may also refer in the context of certain provisions of the Act to any intending insurer or quondam insurer.
The contention therefore that because the word " insurer" has been used in section 33 or section 2D those sections can only apply to insurers who are actually carrying on business cannot necessarily succeed, and we have to see whether in the context of these provisions an insurer will also include a person who was an insurer but has closed his business.
As we have said already the Act was passed to control the business of insurance in the interest of policy holders and the general public and section 33 is obviously a provision by which the Central Government can order investigation into the affairs of any insurer in order to carry out the policy of the Act.
Could it be said in the circumstances that section 33 only applies to insurers actually carrying on business and not to insurers who have closed their business? If the policy of the Act is to be carried out and the policy holders and the general public are to be protected, the need for making investigation into the affairs of an insurer who has closed his business is greater, for he may have done so dishonestly.
We are therefore of opinion that the word " insurer" as used in section 33 not only refers to a person who is actually carrying on business but in the context of that section and taking into account the policy of the Act and the, purposes for which the control envisaged by the Act was imposed on insurers also refers to insurers who were carrying on the business of insurance but have closed it.
Further if there were any doubt whether the word " insurer " in section 33 refers to those insurers also who had closed their business that doubt in our opinion is completely dispelled by section 2D.
That section 866 provides that every insurer shall be subject to all the provisions of the Act in relation to any class of insurance business so long as his liability in India in respect of business of that class remains unsatisfied or not otherwise provided for.
Obviously this section applies to those insurers who have closed their business.
It was not necessary to enact this section if the word ,insurer" here also meant a person actually carrying on the business of insurance, for the provisions of the Act apply to such a person proportion vigor.
Therefore, when the word " insurer " is used in section 2D it must mean a person who was carrying on the business of insurance but has closed it.
If that is so, section 33, which provides for investigation, would apply to such an insurer who has closed his business, by virtue of section 2D.
Mr. Aggarwala next contends that section 2D would only apply to those cases where an insurer was carrying on different classes of insurance business and had closed some of them but not all of them.
He contends that the section provides that the insurer shall remain subject to the provisions of the Act in relation to any class of insurance business so long as his liabilities with respect to that class of business remain unsatisfied or not otherwise provided for.
This, according to him, contemplates a closure of only some out of many classes of business of insurance and not of all.
We see no reason however to limit the words used in this section only to a case where out of many classes of business, some are closed and others are being carried on.
Under section 13 of the , No. X of 1897, in all Central Acts and Regulations, unless there is anything repugnant in the subject or context, words in the singular shall include the plural and vice versa.
Though therefore section 2D speaks of any class of insurance business in the singular it, includes the plural also and would refer to all classes of insurance business.
Mr. Aggarwala does not contend that where, for example, four classes of business are being carried on and three of them are closed and one is continued, the section will not apply; but he contends that at least one must continue and the section will not apply if all are closed.
We do not see why if the section 867 applies, even though the word "class" is in the singular, to a case where three out of four classes are closed and one is continued it should not apply to a case where all four classes are closed.
We see no repugnancy in the context in holding that if all classes of business are closed the insurer shall be subject to all the provisions of the Act so long as his liabilities in India in respect of any business of all classes remain unsatisfied or not otherwise provided for.
Therefore on a plain reading of, section 2D there can be no doubt that an insurer who has closed all classes of his insurance business remains subject to all the provisions of the Act in relation to such classes so long as his liabilities in India remain unsatisfied or not otherwise provided for.
Therefore section 33 will certainly apply to a case where all classes of insurance business have been closed so long as the liabilities remain unsatisfied or not otherwise provided for.
The first contention of the appellant therefore that no investigation can be ordered under section 33 in its case because it has closed all classes of its insurance business fails.
Turning now to the second contention, the argument on behalf of the appellant is three fold.
In the first place it is urged that an order can only be made under section 33 read with section 2D when the Central Government is satisfied that the liabilities have not been satisfied or otherwise provided for, and that the order should show on the face of it that the Central Government had considered this aspect of the matter and had come to the conclusion that the liabilities remained unsatisfied or not otherwise provided for.
Further there is nothing in the present order to show that the Central Government ever considered this aspect of the matter and was satisfied that the liabilities of the appellant Company remained unsatisfied or not otherwise provided for.
There is no doubt that the order is utterly silent on this point and it was only in his letter of October 15, 1957, that the Assistant Controller pointed out section 2D of the Act and referred to this aspect of the matter.
It seems to us only just and proper that when an order is being passed under section 33 read with section 2D of the Act it should show on the face of it that the 868 Central Government was prima facie satisfied that the liabilities had remained unsatisfied or not otherwise provided for it is only when the liabilities have not been satisfied or otherwise provided for that an order under section 33 read with section 2D would be justified in the case of an insurer who has closed his business.
We use the word " prima facie " advisedly, for it seems to have been suggested in the High Court that no order could be passed under section 33 unless it was proved to the hilt that there were liabilities which remained unsatisfied or otherwise unprovided for.
It is obvious that such proof would only be available after investigation in to the affairs of the insurer.
Therefore in order that section 2D may be workable, all that is required under it is that the Central Government should be satisfied after such prima facie inquiry as it considers necessary that there are reasons to believe that the liabilities of the insurer who has closed his business remain unsatisfied or not otherwise provided for and in coming to this prima facie conclusion the Central Government may make enquiry from the insurer with respect to complaints that it may have received against him.
But the fact that the order does not on the face of it show that the Central Government considered this aspect of the matter would not make it bad, if in subsequent proceedings taken to challenge it is shown that there were materials before the Central Government which would justify its coming to the prima facie conclusion that the liabilities had Dot been satisfied or otherwise provided for, and therefore an investigation into the affairs was called for.
In the present case we find from the materials on the record that there were complaints before the Central Government from those who had claims against the company.
Those complaints were apparently referred to the Company and it does not appear that the Company satisfied the Central Government that the complaints were unjustified.
It was in this situation that the order for investigation was made in July, 1957, after the Company had closed its insurance business.
Further on the materials available on the record it does appear that even now there are claims pending to the tune of about one lac of rupees against the Company.
So it cannot 869 be said that there were no liabilities of the Company outstanding which were not satisfied or otherwise provided for when the order was made in July, 1957.
In the circumstances the order cannot be held to be bad because it does not show on the face of it that there were liabilities which had remained unsatisfied or not otherwise provided for.
In the second place it is urged that there can be no question of satisfying or otherwise providing for liabilities unless the liabilities are ascertained and either admitted or proved.
In other words the argument is that it is only those liabilities which are admitted by the insurer or which have been decreed against him and the decrees have become final which can be taken into account in deciding whether the liabilities have remained unsatisfied or not otherwise provided for.
It is urged that only those liabilities which are ascertained and either undisputed or proved can be satisfied and that the same applies to their being otherwise provided for.
It is true that only those liabilities, which are ascertained and either admitted or proved, can be satisfied; but it does not follow that " provision otherwise " must also be only of liabilities which are ascertained and either admitted or proved.
If that were go a dishonest insurer who closes his business could always get out of the provisions of section 33 read with section 2D by repudiating all claims made against him and then saying that there are no liabilities which remained unsatisfied or otherwise `unprovided for.
There can be no doubt, therefore, if these provisions have to serve the purpose for which they were enacted, (namely, the protection of the interest of the policy holders and the general public), the words ',not otherwise provided for" in section 2D must refer to liabilities in the nature of claims against the insurer whether the insurer admits them or not and whether a decree has been finally passed in respect of them or not.
The intention of making this provision in section 2D is to ensure that probable claims arising out of the insurance business that is closed are provided for before the insurer who has closed his business can say that he is not governed by all the provisions of the Act.
There can be no doubt, therefore, 113 870 that when " provision otherwise " has to be made it must be with respect to probable claims also that are likely to arise out of the insurance business which has been closed.
In the present case even the Company admits that there are probable claims to the tune of about rupees one lac still pending and in the circumstances until they are satisfied or it is shown that they have been provided for otherwise, all the provisions of the Act, including section 33, will apply to the Company.
The last argument in support of the second contention is that the liabilities have been otherwise provided for.
It is said that the Company deposited Rs. 3,94,000 as security under section 7 of the Act, which is still available to pay off the liabilities of the Company and therefore when such liabilities do not appear to exceed that amount they have otherwise been provided for.
The question thus raised is whether the Company is entitled to take into account the security deposit under section 7 in order to show that the liabilities have been otherwise provided for.
The contention on behalf of the Controller is that when the Act envisages " provision otherwise ", this provision has to be over and above the security deposit made by the Company under section 7.
It appears from section 8 that this deposit is available for the discharge of liabilities arising out of policies of insurance issued by the insurer so long as any such liability remains unsatisfied.
But even if a decree has been obtained by a policy holder on the basis of a liability under the policy he is not entitled to attach any part of this deposit until he shows that he has failed to realise the decree in any other way.
Further it appears that section 8 only contemplates policy holders holding a decree attaching part of the security deposit in case they fail to realise their debt in any other way ; it does not contemplate, for example, third parties who have decrees against an insurer, like the Company (which in its motor insurance business indemnifies the policy holders against third party risk up to a certain extent), doing so.
Such third parties cannot under any circumstances attach any part of the deposit, for section 8 only permits its attachment in the last resort by a policy holder of the 871 insurer in respect of a debt due upon a policy.
But under section 2D the decree of a third party in such a case would be the liability of the insurer in respect of his motor insurance business which could not be realised by attachment of any part of the deposit under section 7.
Besides, even with respect to decrees of policy holders the deposit could only be attached when all other ways of realising the money have failed.
In these circumstances it can hardly be said that the fact that this deposit is there is itself a " provision otherwise " to meet the liabilities of the insurer.
The policy holder cannot attach this deposit unless he first exhausts all other means.
Even if be has got a decree and even if the insurer admits his claim and wants to pay it, he cannot do so out of the money in deposit under 'section 7.
As for third parties who may have decrees against the insurer, they can never attach this deposit in view of the provisions of section 8.
It could not be the intention of the legislature when it was in effect exempting the insurer from all the provisions of the Act on his liabilities being otherwise provided for that such provision should include the security deposit under section 7, when it has made it so difficult for a policy holder to get his debt satisfied from that deposit and when it is clear that a third party could not in any way attach the deposit.
In these circumstances we are of opinion that when section 2D provides that the insurer shall be subject to all the provisions of the Act so long as his liabilities in India in respect of the business which is closed remain unsatisfied or not otherwise provided for, the satisfaction or " provision otherwise " does not refer to the deposit under section 7 and has to be over and above that deposit.
It is true that section 9 provides that the insurer can take back the deposit after satisfying the court that he has satisfied or otherwise provided for his liabilities.
But this " provision otherwise " for the purposes of section 9 must obviously be other than the deposit itself.
Further when the insurer wants to take back his deposit on making " provision otherwise " he will have to satisfy the court that the " provision otherwise " has been fully made and the court will be in a position to investigate into the matter.
This, however, does not mean that if the insurer does 872 not want to take advantage of section 9 of the Act he can say without submitting to the terms of that section that he has made " provision otherwise ", because the deposit which is made under section 7 is more than all his liabilities of the insurance business that he has closed.
It is urged that it is hard, for example, on an insurer who has a large deposit and whose liabilities are small that he should not be able to fall back on his deposit for the purposes of section 2D.
We do not, however, see any hardship in a case of this kind, for if it is a fact that the deposit of the insurer is large and his liabilities are small he can always take advantage of section 9 of the Act and submit to an investigation by the court and take back his deposit after depositing the small sum required to meet his liabilities.
We are, therefore, of opinion that when section 2D speaks of satisfaction or " provision otherwise " for the liabilities of insurance business which is closed it contemplates such satisfaction or " provision otherwise" over and above the deposit made under section 7.
It is not in dispute in this case that there are some liabilities still pending; it is also not in dispute that they are not satisfied and no provision has been made otherwise for them irrespective of the security deposit.
This also appears to have been the position when the order was made in July, 1957.
In the circumstances the order is good and cannot be called in question by the Company.
The appeal therefore fails and is hereby dismissed with costs.
Appeal dismissed.

Output:
The appellant company had been carrying on various classes of insurance business other than life insurance after its incorporation in 1941, but in 1956 the shareholders of the company passed a resolution by which all its insurance business was to be closed.
Accordingly, on application made by the company to the Controller of Insurance, the certificate granted to it for carrying on insurance business was cancelled with effect from July 1, 1957.
in the meantime, complaints against the company were being received by the Government of India, who, thereupon, passed an order on July 17, 1957, under section 33 of the , directing the Controller of Insurance to investigate the affairs of the company and to submit a report.
The company challenged (1)(1923) L.R. 51 I.A. 129.
(2) I.L.R. 858 the legality of the order on the grounds, (1) that as all its insurance business had been closed the Central Government had no jurisdiction to pass an order under section 33 of the Act, which only enables the investigation of the affairs of an insurer who, as defined in section 2(9), is one who is actually carrying on the business of insurance, (2) that such an order could not be sustained under section 2D of the Act as that section was applicable only to those cases where an insurer was carrying on different classes of insurance business and had closed some of them but not all of them, (3) that even if such order could be passed under section 33 read with s.2D it could not be done in the present case as the company 's liabilities did not remain unsatisfied or not otherwise provided for, and (4) that, in any case, the order in question was invalid because it did not show on the face of it that the Central Government was prima facie satisfied that the liabilities had remained unsatisfied or not otherwise provided for: Held, (1) that the word " insurer " in section 33 of the , refers not only to a person who is actually carrying on the business of insurance but also to one who has subsequently closed it.
(2) that in section 2D of the Act an " insurer " means a person who was carrying on the business of insurance but has closed it.
(3)that the word " class " in section 2D though used in the singular includes the plural also and the section is applicable to the case where an insurer who was carrying on different classes of insurance business closes all of them.
(4) that the expression " not otherwise provided for " in section 2D refers to liabilities in the nature of claims against the insurer whether the insurer admits them or not and whether a decree has been finally passed in respect of them or not.
(5) that under section 2D the satisfaction or " provision other wise " for the liabilities of insurance business which is closed, does not refer to the deposit made under section 7 and has to be over and above that deposit.
(6) that though an order under section 33 read with section 2D of the Act should show on the face of it that the Central Government was prima. ' facie satisfied that the liabilities had remained unsatisfied or not otherwise provided for, the fact that the order does not on the face of it show that the Central Government considered this aspect of the matter would not make it bad, if in subsequent ,proceedings taken to challenge it, it is shown that there were materials before the Central Government which would justify its coming to the prima facie conclusion that the liabilities had not been satisfied or otherwise provided for, and therefore an investigation into the affairs was called for.