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Indian Timber and Plywood Corporation Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference Nos. 96, 97 and 98 of 1977
Judge
Reported in[1981]130ITR341(Ker)
ActsMadras Preservation of Private Forests Act, 1949 - Sections 3(2)
AppellantIndian Timber and Plywood Corporation Ltd.
RespondentCommissioner of Income-tax
Appellant Advocate T.L. Viswanatha Iyer,; P.S. Narayanan,; K.S. Menon,;
Respondent Advocate P.K. Ravindranatha Menon, Adv.
Cases ReferredBerghs Ltd. v. Clark
Excerpt:
.....rule 7 of preservation of private forests act - whether decision of appellate tribunal treating receipts of assessee-company from sale of timber and charcoal covered by exemption granted by government as income from business valid in law - object of company was exploitation of forest - assessee assured that forest wealth would not be exhausted and there would be constant reafforestation both natural and artificial - cutting and removal of trees nothing more than part of profit making apparatus of assessee - held, decision of tribunal not valid. - - the forest wealth was stated to be well nigh inexhaustible as there is a constant reafforestation, both natural and artificial. it is enough to notice that the assessee's appeal to the aac was unsuccessful, as far as the aspects raised..........between the assessee and the department that the income from sale of forest trees was taxable as revenue receipts. 5. on april 25, 1962, the assessee submitted a petition to the chief conservator of forests with a working plan for exploitation of the forests. the working plan suggested a method of clearing the forest, replanting the same and raising eucalyptus, cardamom, etc., plantations. the govt. of kerala approved the working plan by g.o. dated august 6, 1962, subject to certain modifications. they also exempted the forests from the provisions of section 3(2) of the madras preservation of forests act. along with the government order, a notification was also issued exempting the assessee from the operation of section 3(2) of the act for the year ended december 31, 1963. similar.....
Judgment:

Gopalan Nambiyar, C.J.

1. At the instance of the assessee, the Indian Timber & Plywood Corporation Ltd., Calicut, two questions of law were compelled for reference under Section 256(2) of the Act. The Income-tax Appellate Tribunal, Cochin Bench, has accordingly sent up its statement of the case and referred the following questions of law for our opinion, viz :

'1. Whether, on the facts and in the circumstances of the case, the decision of the Appellate Tribunal treating the receipts of the assessee-company from the sale of timber and charcoal from areas covered by the exemption granted by the Government as income from business is valid in law ?

2. Whether, on the facts and in the circumstances of the case, the said receipts are not capital assessable under capital gains ?'

2. The assessment years with which we are concerned are 1969-70, 1970-71 and 1971-72. The accounting year ends on June 30, 1968, June 30, 1969, and June 30, 1970, respectively. A prospectus was issued at the time of incorporation showing the forests which had been taken on lease and the trees which were to be cut and sold ; the position disclosed was that the assessee had taken lease for a sum of Rs. 2.5 lakhs from Amalgamated Malabar Estates Ltd. of Calicut, about 10,000 acres of virgin forest land in Malabar. The lessors had acquired the property only two years prior to the lease. The lease was for a term of 83 years. The property was known as 'Poithana Estate'. The shareholders were assured by the prospectus that the operations to be carried on will not exhaust the forest. The forest wealth was stated to be well nigh inexhaustible as there is a constant reafforestation, both natural and artificial.

3. The forests were in the Malabar area of the Kerala State, governed since 1949, by the provisions of the Madras Preservation of Private ForestsAct, 1949. By Section 3 of the Act no owner of any forest can, without the previous sanction of the District Collector, sell, mortgage, lease or otherwise alienate the whole or any portion of the forests. By definition, 'owner' includes a person in possession. By Sub-section (2) of Section 3, no owner and no one claiming under him a contract, licence, etc., shall, without the previous permission of the Collector, cut trees or do any act likely to denude the forests. Under Sub-section (3) of Section 3, the Government could exempt any forest or classes of forests from the purview of the provisions of the Act. Rules have been framed for cutting trees. Rule 7 of the Rules reads :

7. (a) Felling and removal of any trees grown within one chain of either bank of any stream is prohibited.

(b) All trees except casuarina shall be felled at a height not exceeding six inches from the ground, the bark being left intact on the stump and adhering to it all-round the stump without being turned off or otherwise damaged. In the case of casuarina trees, the removal of the stump and root will also be permitted.'

4. The assessee had been exploiting timber and other saleable forest produce for the last 30 years. Till the assessment year 1968-69, there was no dispute between the assessee and the department that the income from sale of forest trees was taxable as revenue receipts.

5. On April 25, 1962, the assessee submitted a petition to the Chief Conservator of Forests with a working plan for exploitation of the forests. The working plan suggested a method of clearing the forest, replanting the same and raising eucalyptus, cardamom, etc., plantations. The Govt. of Kerala approved the working plan by G.O. dated August 6, 1962, subject to certain modifications. They also exempted the forests from the provisions of Section 3(2) of the Madras Preservation of Forests Act. Along with the Government order, a notification was also issued exempting the assessee from the operation of Section 3(2) of the Act for the year ended December 31, 1963. Similar notification had been issued granting exemption every year from December 31, 1964, to December 31, 1965. For the calendar year, 1967, it was notified that coup No. 13 of the Pozhuthana Malavaram would be exempt from Section 3(2) of the Act, for a period of one year (the year was taken to be the calendar year). For the year 1968, a similar notification was issued exempting coup No. 13. There was a further notification dated September 24, 1968, exempting coup No. 13 from compliance with Rule 7(b), which we have already noticed. The result was that the company was exempted from Section 3(2) for both the years and exempt from Rule 7(b) from January 1, 1968.

6. For the assessment years 1969-70 and 1970-71, the assessee claimed that the amount realised by the sale of trees was assessable only as capital gain. During 1969-70, the total receipt on sale of trees from the forestswas Rs. 5,67,891. Receipts under other heads totalled Rs. 9,33,552. The assessee showed the former amount as part of the capital gains and deducted therefrom certain costs and value as on January 1, 1954, and showed a capital gain of Rs. 7,609; The business income was shown at Rs. 1,523. The officer did not accept this claim.

7. For the assessment year 1970-71, the facts were practically the same and the ITO's conclusion was also the same. For the year 1971-72, the assessment proceeded on the same footing. It is enough to notice that the assessee's appeal to the AAC was unsuccessful, as far as the aspects raised in this reference are concerned. For the year 1971-72, by the time the AAC took up the appeal, the Tribunal's decision in the earlier two years had been rendered. The AAC, therefore, followed the Tribunal's decision and held against the assessee. On further appeal, the Tribunal held that the income from the sale proceeds of forest trees was only revenue receipt and not a capital receipt. From the said decision of the. Tribunal, the question of law have been formulated for our opinion.

8. In Shaw Wallace & Co.'s case [1932] 2 Comp Cas 276 ; AIR 1932 PC 138, the concept of 'income' with respect to the provisions of theIndian I.T. Act, 1922, was thus expounded (p. 280 of [1932] 2 CompCas):

'The object of the Indian Act is to tax 'income', a term which itdoes not define. It is expanded, no doubt, into ' income profits and gains', but the expansion is more a matter of words than of substance. Income,their Lordships think, in this Act connotes a periodical monetary returncoming in' with some sort of regularity, or expected regularity, fromdefinite sources. The source is not necessarily one which is expected to becontinuously productive, but it must be one whose object is the productionof a definite return, excluding anything in the nature of a mere windfall.Thus, income has been likened pictorially to the fruit of a tree, or the cropof a field. It is essentially the produce of something, which is oftenloosely spoken of as 'capital'. But capital, though possibly the source inthe case of income from securities, is in most cases hardly more than anelement in the process of production.'

9. In Maharaja Chintamani Saran Nath Sah Deo's case : [1961]41ITR506(SC) , the question arose in regard to the amount derived by the assessee in respect of four licences granted to different parties to prospect for bauxite. The licence was with the right to enter upon the land, to prospect, search and mine, quarry, bore, dig and remove all bauxite lying in or within the land. It was held that the licence was not merely a grant of the use of the capital of the assessee, but was really a grant of a right to a portion of the capital in the shape of a general right to the capital asset...The amounts received were held to be capital receipts not assessable to income-tax. It was observed (p. 511):

'What the licence gave to the licensee was the right to enter upon the land to prospect, search and mine, quarry, bore, dig and remove all bauxite lying in or within the land and for that purpose the licensee had the right to dig pits, shafts, borings and to remove, take away and appropriate samples and specimens of bauxite in reasonable quantities not exceeding 100 tons in the aggregate. It cannot be said that this amounts merely to a grant of the use of the capital of the licensor but it was really a grant of a right to a portion of the capital in the shape of a general right to the capital asset.

10. In support of this distinction between the use of capital and the taking away of capital, counsel relied upon the following observation of Lawrence J. in Greyhound's case [1936] 20 TC 373 :

'The question as to what receipts are revenue and what are capitalhas given rise to much difference of opinion; but it is clear, in my opinion,that, if the sum in question is received for what is in truth the user ofcapital assets and not for their realisation, it is a revenue receipt, notcapital.

That may be so but the question has to be decided on the nature of the grant. The terms of the covenant in the present case which have been quoted above show that the transaction was not one merely of the user of capital assets but of their realisation. By this test, therefore, the receipts were on capital account and not revenue. '

11. In CIT v. N. T. Patwardhan : [1961]41ITR313(Bom) , the Bombay High Court had occasion to consider whether the income realised from sale of trees of spontaneous growth on an extent of 10 square miles of grass lands belonging to the assessee represented a capital receipt or revenue receipt. The Tribunal found that it was a capital receipt. Affirming the said finding, it was observed (p. 318):

'In our opinion, the view taken by the Tribunal is right. The asset of the man was the land with the wild growth of trees on it. If the land with the trees had been sold, there could have been no doubt that the sale was a realisation of capital and it would not have been possible to argue that the transaction in so far as it involved a sale of the trees was a sale producing income and the remaining part of the transaction was a capital sale. In the present case the land is retained by the assessee but a part of the asset is disposed of in its entirety by selling the trees with roots once and for all. As we have already stated earlier, whether in a given case, there is a Capital sale or sale producing income must depend upon the facts and circumstances of: the case, and it seems to us that in a case like the present where a man, on whose lands a wild growth of trees had stood for a numberof years without any attempt being made by him to realise any income therefrom, sells the trees once and for all with their roots, the transaction is on account of capital and not of revenue, for, by disposing of the roots of the trees, he has disposed of the source from which a fresh growth of wood would spring up. Mr. Joshi has argued that no capital has been invested by the man in the growing of the trees and the trees which have grown spontaneously form no part of his capital. His capital is only the land and that also is the source of his income. Mr. Joshi argues that even if the trees are disposed of by their roots, so long as the land is retained, the source for a fresh germination of trees of spontaneous growth is still possessed by the man and the trees will grow again in course of time. We are not impressed by this argument. The fact that the man was not required to invest capital in growing the trees, is, in our opinion immaterial and the trees with their roots and growth are still an asset of the man. As to the possibility of a fresh growth of trees spontaneously springing up on the land in course of time we do not think that such distant and remote possibility would persuade us to hold that the capital asset of the man and the source of income was merely the land and the roots of the trees which had firmly grown and securely embedded in the land providing a ready and easy source for fresh growth of wood when the trees were cut did not form any part thereof. '

12. It is to be noted that the lands were grass lands and there was nothing to show that the cutting and removal of the trees was part of any process of regeneration or of any income-raising machinery. The above decision of the Bombay High Court was referred to by the Supreme Court in A. K. T. K. M. Vishnudatta Antharjanam v. Commr. of Agrl. IT : [1970]78ITR58(SC) . That decision was on appeal against the decision of this court reported in : [1969]71ITR733(Ker) . This court's judgment was reversed. The question which arose was whether the income realised by the sale of trees in a teakwood plantation was a capital receipt or revenue receipt. Differing from this court, it was held by the Supreme Court that the receipts were capital receipts. The court observed (p. 60):

'The principal point that has to be determined is whether the sale proceeds of the teak trees constituted capital or revenue. It appears to have been common ground before the High Court that the assessee planted the teak trees some time in the year 1946-47. The form of the question itself showed that the trees were cut and completely removed from the land together with their roots for the purpose of planting rubber. There was ho question of any further regeneration or growth of the trees which had been cut and removed. In other words there was no possibility of recurring income from these trees. In V. Venugopala Varma Rajah v. Commissioner of Income-tax : (1974)IILLJ435SC , the question before thiscourt was whether trees which had not been removed with the roots and the stumps of which had been allowed to remain in the land was in the nature of income. This is what was observed in that case:

'Where the trunks are cut so that the stumps remain intact and capable of regeneration, receipts from sale of the trunks would be in the nature of income. It is true that the tree is a part of the land. But by selling a part of the trunk, the assessee does not necessarily realise a part of his capital. We need not consider whether in case there is a sale of the trees with the roots so that there is no possibility of regeneration, it may be said that the realisation is in the nature of capital. That question does not arise in the present case.'

13. The present question was apparently left open and was not decided as the point which arose there did not relate to sale of trees of which the roots had also been taken out for the purpose of planting some other kind of trees, e.g., rubber, as in the present case.

14. It seems to us that the well-known test laid down by the Privy Council in CIT v. Shaw Wallace and Co. , to rind out whether a particular receipt is income is not satisfied in the facts and circumstances of the present case. According to that test, income connotes a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return excluding anything in the nature of a mere windfall. Once the teak trees were removed together with their roots and there was no prospect of regeneration or of any production of a return therefrom, it could well be said that the source ceased to be one which could produce any income. The Bombay High Court in CIT v. N. T. Patwardhan : [1961]41ITR313(Bom) said that from the point of view of a person engaging himself in the business of sale of trees the capital structure would be not only the land on which the trees stood but also the roots of the trees from which the wood yielded income. If the trees were sold off with the roots the capital structure would be affected.

15. The High Court in the judgment under appeal was particularly impressed with the profit motive of the assessee in planting teak trees although that was done 'several years ago. But it was overlooked that profit motive is not decisive of the question whether a particular receipt is capital or income. An accretion to capital does not become taxable income merely because am asset is acquired in the hope that it may be sold at a profit. It must also be remembered that trees so long as they are uncut form a part of the land. If they are cut with roots once and for all a part of the assets is disposed of. The sale proceeds on account of their disposalcannot constitute revenue because by removing the roots the source from which fresh growth of trees can take place, is also removed. The sale of such trees thus affects the capital structure and cannot give rise to a revenue receipt.'

16. Venugopala Varma Rajah's case : (1974)IILLJ435SC , which was referred to in the above case, was one where the trunks of trees of spontaneous growth were cut so that the stumps were allowed to remain in the land with the bark adhering to the stumps to permit regeneration of the trees. It was held that the receipts from the sale of the trunks would be a revenue receipt and liable to be assessed to income-tax. The Supreme Court observed (p. 466):

'It is not necessary for the purpose of this case to enter upon a detailed analysis of the principle underlying the decisions and to resolve the conflict. On the finding in the present case it is clear that the trees were not removed with roots. The stumps of the trees were allowed to remain in the land so that the trees may regenerate. If a person sells merely leaves or fruit of the trees or even branches of the trees it would be difficult (subject to the special exemption under Section 4(3)(viii) of the Income-tax Act, 1922) to hold that the realization is not of the nature of income. Where the trunks are cut so that the stumps remain intact and capable of regeneration, receipts from sale of the trunks would be in the nature of income. It is true that the tree is a part of the land. But by selling a part of the trunk, the assessee does not necessarily realise a part of his capital. We need not consider whether in case there is a sale of the trees with the roots, so that there is no possibility of regeneration, it may be said that the realisation is in the nature of capital. That question does not arise in the present case.'

17. We may then refer to the decision in Ambat Echukutty Menon's case : [1973]87ITR129(Ker) decided by a Division Bench of this court. In hat case, the assessee had purchased lands in court auction in 1905. 700 trees of spontaneous growth were on the lands interspersed among the paddy fields. These trees were sold in 1960 under agreements which provided that the stumps were not to be uprooted or pulled out. The sale was for reclaiming the land for agricultural purpose. On the facts, the High Court held that although the trees were not sold with roots and stumps, the idea was to annihilate the trees once and for all, and to convert the land for agricultural use. Moreover, the assessee was not engaged in the business of felling timber. Therefore, the receipts were treated as of a capital nature and not as revenue receipts. It is enough to observe that on a proper construction of the agreement this court had held that although the trees were not removed with the roots they were removed with the objectand purpose of annihilation of the trees and for converting the land to agricultural use.

18. A case on almost similar facts was what was decided by a Division Bench of this court in Pullangode Rubber and Produce Co. Ltd. v. CIT : [1971]79ITR738(Ker) . The assessee there was a limited company doing rubber plantation business. It took on lease 2,000 acres of forest land from the Senior Rani of the Padinjare Kovilakam under two leases agreeing to pay annual rent of Rs. 2,500 and an additional sum of Rs. 2 for every acre of land brought under rubber cultivation. The second of these leases provided in clarification of the provisions in the earlier deed that the assessee had a right to cut and remove and sell trees and other forest produce subject to payment to the Senior Rani of 50% of the net proceeds of the sale (and 25% for the subsequent contracts). The question arises in regard to the character of the receipts under such contracts. The income-tax authorities assessed these as revenue receipts. The High Court affirmed the finding that the receipts were revenue receipts. In the course of its discussion quoting from the Supreme Court's decision in CIT v. Vazir Sultan & Sons : [1959]36ITR175(SC) , this court pointed out that the trees did not constitute a part of the capital asset of the assessee or part of the assessee's profit-making appartus. The test thus propounded appears quite striking and significant.

19. We may briefly notice the decisions of the Supreme Court in CIT v. Vazir Sultan & Sons : [1959]36ITR175(SC) . The majority judgment in that case, after surveying the decisions which discussed the distinction between capital receipt and revenue receipts, referred to South India Pictures Ltd.'s case : [1956]29ITR910(SC) . The court noticed the three reasons given as to why a receipt in question was assessable as revenue receipt. Reason No. 3 stated was that the cancelled agreements constitute the framework or whole structure of the assessee's profit-making apparatus in the same sense as in the English decision in Van den Berghs Ltd. v. Clark (Inspector of Taxes) [1935] 3 ITR 17 .

20. Counsel for the revenue and for the assessee referred to very many other decisions. We do not think it necessary to survey all these. In some of the earlier decisions, the law seems to have been stated a little too widely (see for instance, Manavedan Thirumalpad's case, AIR 1930 Mad 764 which broadly and generally compared a forest to a mine or to a paddy field). But in the light of the principles laid down in the decisions noticed and the facts disclosed in the present case, we feel little difficulty in affirming the conclusion of the Tribunal that the receipts in question were revenue receipts and not capital receipts. The object of the company as announced in the prospectus was exploitation of the forest. It was assured that the forest wealth would not be exhausted and that there would be aconstant reafforestation, both natural and artificial: It was the business ofthe company to exploit the forest. The cutting and removal of the trees,in the circumstances, appears to us to be, nothing more than part of theprofit-making apparatus of the assessee. That the assessee had obtained exemption from Rule 7 of the Preservation of Private Forests Act or that thetrees had been cut and removed together with roots, leaving no trace ofthe stumps behind, do not appear to us, in the circumstances, to make anydifference. Nor are we guided in making the assessment by considerationof the profit motive of the assessee, which as pointed out in VishnudattaAntharjanam's case : [1970]78ITR58(SC) , is not material for deciding theissue.

21. All things considered, we think, the view taken by the Tribunal wascorrect. In the result, we answer question No. 1 in the affirmative, i.e.,in favour of the revenue and against the assessee ; and question No. 2 inthe negative, i.e., against the assessee and in favour of the revenue. Wemake no order as to costs.

22. A copy of this judgment under/the signature of the Registrar and theseal of the court will be communicated to the Tribunal, as required bylaw.


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