This is an assessee's appeal for the assessment year 1989-90 against the order of Commissioner (Appeals), Belgaum, dated 15-3-1991, on six grounds pertaining to the only one issue of taxing the income derived from the sale of water from the pond located in the agricultural land of the assessee.
I have heard at length the learned representative for the assessee Shri G.N Gadgil as well as the learned Departmental Representative, Shri R.K. Gupta.
Their arguments are taken into consideration. I have also perused the relevant averments from the paper book filed on behalf of the assessee.
I have also gone through the case law cited by Shri G.N. Gadgil on behalf of the assessee.
The real facts of the dispute under consideration are very simple. The assessee owned agricultural land at Sancoale, Goa. She sold an elevated agricultural land to M/s Zuari Agro Chemicals Ltd. It appears that the assessee is still the owner of low level agricultural land. By virtue of owning a low level agricultural land a pond is located in her land.
The said pond gets filled with the water in the monsoon from year to year. However, it was informed at the time of argument that water never dries up in the said pond located in the agricultural land of the assessee.
M/s Zuari Agro Chemicals Ltd. also constructed an artificial pond for stocking water for use in their factory. They needed more water than they get from the government sources. Therefore, M/s Zuari Agro Chemicals Ltd. approached the assessee with a request to allow them to draw water from the appellant's pond top up their own reservoir to make enough water available for their factory. The assessee thus selling the water from the pond located in her agricultural land to M/s Zuari Agro Chemical Ltd. (hereinafter referred to as ZACL) since the financial year 1981-82. The assessing officer as well as the Commissioner (Appeals), found from the record that M/s ZACL continuously pumped the water from the pond located in the agricultural land of the assessee to their pond. To get the continuous water facility the said M/s ZACL entered into negotiations with the assessee. They fixed the payment of Rs 2,85,000 per year. The terms and conditions were reduced into writing. The assessee put certain conditions to M/s ZACL for drawing water from the pond owned by the assessee. M/s ZACL accepted the said terms and conditions. The conditions put upon by the assessee on M/s ZACL are as follows : 1. You are to make your own arrangements to take water for the use in your factory without causing detriment or damage to the agricultural or horticultural operations which are being carried on by me on the said agricultural land.
2. The permission given to you to take water shall be subject to the conditions that my agricultural operations shall not suffer in anyway for want of water. You will also strictly ensure that no nuisance shall be caused or committed on the land by your agents or servants and that they shall not interfere with the fruit or yield on that land.
3. To compensate the loss caused owing to less use of water by me, for the reason for having allowed you to take the water for your use, it is agreed that you will pay me a lumpsum amount which in no case be less than Rs. 2,85,000 (Rupees Two Lakhs Eighty-Five Thousand only) payable in mutually agreed instalments.
4. This agreement shall be for one year effective 1-1-1984, to 31-12-1984, subject to the water in the pond getting dried up owing to the summer earlier.
5. It is clearly understood that by allowing you to use surplus water available on my land does not create any enforceable right in your favour against me.
Thus, it becomes clear that M/s Zuari Agro Chemicals Ltd. (ZACL) put proposal before the assessee to allow them to get the supply of water for using it in their factory. The assessee accepted the said proposal.
Making proposal and acceptance of the same is with a lumpsum amount of consideration of Rs 2,85,000 per year. Thus, the conditions necessary for the contract have been fully fulfilled. The conditions for the contract are making a proposal fixing the consideration and acceptance of the same. These elements have been satisfied under a contract. The contract is also created for a profit i.e., earning income every year.
The assessee claimed that the water in the pond is immovable property as per the definition given in section 3(26) of the General Clauses Act and section 2(6) of the Indian Registration Act. It was argued that the water in the pond being immovable property has to be treated as an agricultural land. The ingredient of immovable agricultural lands are that the agricultural lands require to be cultivated, irrigated, seeds sown and crops reaped. The agricultural land is also transferable under a sale deed by gift or a charge can be created on the agricultural lands. However, the water in the pond is neither transferable nor any charge can be created on it ordinarily. Further, in the case of agricultural land there should be transfer in respect of sale or gift in the sale deed or gift deed. But water in the pond cannot be registered under a sale deed or gift deed. The only common factor is that consideration has to be received for transfer of immovable property and consideration has been received for allowing to fetch the water from the pond located in the agricultural lands of the assessee to M/s ZACL.
Another argument advanced on behalf of the assessee was that if the water in the pond is treated as immovable agricultural property, then the property is of capital nature. Therefore, any receipt on account of allowing to fetch water from the pond also becomes a capital receipt and not taxable. To treat the consideration as a capital receipt the pond also must be sold along with the water. But the pond is not sold at all. Only water is being sold year after year against the consideration. Therefore, the sale proceeds of water from the pond located in the agricultural land of the assessee, cannot assume the characteristic of capital receipt as the capital asset i.e., the pond is not sold.The learned representative Shri Gadgil has relied on several decisions before the Commissioner (Appeals). They are V. Venugopala Varma Rajah v. CIT (1970) 76 ITR 460 (SC), A.K.T.K.M. Vishnudatta Andharjanam v.Commr. of Agrl. IT (1970) 78 ITR 58 (SC), CIT v. Ambat Echukutty Menon (1979) 120 ITR 70 (SC), CIT v. M. Rama Lakshmi Reddy (1981) 131 ITR 415 (Mad), CIT v. Bombay Burmah Trading Corporation Ltd. (1986) 161 ITR 386 (SC) and CIT v. Barium Chemicals Ltd. (1987) 168 ITR 164 (AP). The Commissioner (Appeals) distinguished all those decisions in his order in paras 11, 12, 13, 13(I), 14 and 15. In the decision in (1970) 78 ITR 58 (SC) the question involved was the sale of trees along with roots.
Cutting of trees with roots means removal of capital asset itself.
Selling the water from pond without selling the pond cannot be compared with cutting of trees with roots. In the decision in (1979) 120 ITR 70 (SC) sale of trees in the paddy fields was of a capital nature. There is no sale of pond in the instant appeal. In the decision in (1981) 131 ITR 415/416 (SC), the question involved was steady baling out of lorry loads of water by Spencers from the assessee's domestic well. At the same time there was no thought in any one's mind about the payment for the water. There was no proposal, consideration and acceptance in the case in (1981) 131 ITR 415/416 (SC). That is not so in the instant appeal. In the case in (1987) 161 ITR 386 (SC) acquisition of forest lands by the Government of Burma was involved. The acquisition of forest land was a source of the profit-making apparatus of the assessee. That was a capital asset, which was acquired. That was treated as stock-in-trade and no capital receipts arose. The assessee in the present case treated the water in the pond as stock-in-trade.
Hence, the judgment of the Supreme Court is distinguishable on facts.
Shri Gadgil argued that exploitation of water is being made by the assessee and, therefore, the consideration received should be treated as capital receipt. According to him if an agricultural land is capital receipt then any sale proceeds of the water also should be treated as capital receipt. The Commissioner (Appeals) negatived these propositions.
Shri Gadgil relied on the decision of Gujarat High Court in the case of Amrutlal ChaganIal v. CIT (1972) 84 ITR 677 (Guj). In that case there was an oral contract between the parties. On the basis of oral contract the contractee was entitled to enter upon the land of the assessee to dig and remove earth from them and they were to pay a consideration at the rate of Rs. 2 per thousand bricks manufactured out of the earth so removed. The Tribunal found that the income was liable to be taxed in the hands of the assessee. The Gujarat High Court held that the amount realised by each of the assessees from the sale of earth represented capital gains and not revenue receipt. However, the facts are not quite identical with the assessee's case, as earth and water cannot be compared as the first is not replishable, whereas the latter is replishable.
Another judgment relied upon is the decision of Madras High Court in the case of CIT v. M. Ramalakshmi Reddy (supra). In that case it was held on the facts, that the casual receipt could not be treated as a business profit. A fact of the utmost importance in that case was that the assessee was a married woman who was intent upon building a family residence and running her family in it and who had no thought of running business of any sort of her own. The receipt was a casual and non-recurring receipt and, hence, not taxable. In the instant appeal the receipt is recurring against the sale of water from the pond.
Moreover, there was no intention on the part of the assessee to run any business. In the instant appeal the appellant had an intention to allow the water to be fetched continuously from the pond located in her agricultural land against a consideration and therefore, the judgment of Madras High Court is not applicable to the facts of the case.
The learned Departmental Representative Shri R.K. Gupta relied on the judgment of Supreme Court in the case of V. Venugopala Verma Raja v.CIT (supra) which was followed by the Commissioner (Appeals). What is held by the Supreme Court is as follows : "Where the trunks of trees of spontaneous growth are cut so that the stumps are allowed to remain in the land with the bark adhering to the stumps to permit regeneration of the trees, receipt from the sale of the trunks would be in the nature of income." In the instant appeal, the pond is permanently owned by the assessee to collect water during the monsoon year after year but the water is being sold continuously year after year against the consideration. This decision fully applies to the facts of the case. There is no doubt that a pond is an asset and the sale proceeds of the water from the pond cannot be treated as an agricultural income. The agreement is also being renewed year after year." I have examined the facts minutely. In my opinion the assessing officer as well as the Commissioner (Appeals) are right in bringing to tax the regular income of Rs 2,85,000 per year by selling the water collected in the pond located in the agricultural lands of the assessee. The sale proceeds of the water cannot be treated as capital receipt because no capital asset is either being sold or transferred. The consideration from the selling of water is not a casual receipt. For all these reasons, the assessee has to fail and the appeal has to be dismissed.