J.M. Shelat, C.J.
1. Two questions arise in this reference :
'(1) Whether the two-thirds of the sale proceeds of the forest trees and forest produce sold by the assessee during the accounting year, Samvat year 2006, constitute capital receipt, and (2) Whether, on the fact and in the circumstances of the case, certain operations carried out by the assessee with reference to the lands in question constitute agriculture operations, making the sale proceeds agricultural income as defined by section 2(1) and being exempt form income-tax under section 4(3) (viii) of the Income-tax Act of 1922.'
2. The assessee is the present Ruler of the former State of Bansda which merged in the Dominion of India in 1948 and which was attached to the former State Of Bombay. The assessee is the owner of certain forest lands situated in villages Sadaddevi, Ranifalia and Vaghai which were gifted to him by his father in Samvat year 2006, that the relevant previous year. He sold the trees and other forest produce existing on these lands for a sum of Rs. 72,611. The assessee claimed that he had spent during that year in the aggregate the sum of Rs. 22,950 for clearing the said forest which amount was allowed as expenses. The dispute, therefore, centered round the balance of Rs. 49,661.
3. Before the Income-tax Officer, the assessee contended that the amount of Rs. 49,661 constituted capital receipt and, in the alternative, contended that the said sum of Rs. 49,661 was agricultural income. The Income-tax Officer rejected both these contentions and added this amount to the total income of the assessee. While negativing these two contentions, the Income-tax Officer remarked as follows :
'Besides, the income from the sale of forest and forest produce of spontaneous growth worked out above is clearly not agricultural income within the meaning of section 2(1) of the Income-tax Act as the lands from which the said income is derived were not only not assessed to the land revenue in the taxable territories and not subjected to a local rate assessed and collected by the officer of the Government, but they were also not used for agricultural purposes. It is contended by Shri Jokhakar that the assessee received the lands as gifts from time to time during the Bansda State regime and since the forests were already existing on some of the lands, the realisation on sale of forests and forest produce are capital receipts and not income. It is the land which is the capital asset and not the forest and by the sale of forest and forest produce there was no reduction or loss to any capital asset and hence, the sales in question were not capital receipts.'
4. The assessee filed an appeal against the order of the Income-tax Officer before the Appellate Assistant Commissioner, and while the appeal was pending, he filed an affidavit of one Bhalchandra Hariprasad Upadhyaya, who was in the service of the Bansda State until about the year 1942. The affidavit was filed in support of the assessee's contention that the operations which he had carried out in the said forest lands constituted agricultural operations and that, therefore, the income derived by him from the said forest lands was agricultural income. In his affidavit, the said Upadhyaya stated that he was in the service of the Bansda State as a forest Office until about 1942, that thereafter he joined the service of the Baroda State and, at the date of the affidavit, was serving as a range forest officer at Songadh. According to the statements in that affidavit, the lands which were gifted by the assessee's father were forest lands and these forests were developed to his definite knowledge, employing therein human labour and skill, that the Bansda State, like other State Governments, had a forest department consisting of guards and other staff not only to protect the forest from human beings and animals, but also to carry out 'sylvicultural operations including marking of coupe, dibbling, planting, weeding, thinning and doing all types of cultural operations, pruning, digging, etc. and for these operations special skilled staff was kept and maintained by the then Bansda State for all the forests including those that stood on lands in the villages of Ranifalia Sadaddevi and Vaghai gifted by the then Bansda State to H. H. Digverendrasinhji.' He has also stated in that affidavit that the main source of revenue of the then Bansda State was from forests and, therefore, those forests were 'very systematically and scientifically developed and maintained.'
5. These very contentions were urged before the Assistant Commissioner, but they were rejected, the Assistant Commissioner's finding being that the receipts from the forests amounted to Rs. 72,611 and the expenses to Rs. 22,950 and the net income arrived at, namely, Rs. 49,661, represented the produce of spontaneous growth from the forests owned by the assessee. Though he did not agree with the Income-tax Officer that these lands were not assessed to land revenue, he confirmed the finding of the Income-tax Officer that the amount of Rs. 49,661 represented the sale proceeds of the spontaneous growth from the forests for which from the forests for which no agricultural operations were performed. He also rejected the other contention that the forests being a gift from the assessee's father, they were capital assets in the hands of the assessee and, therefore, any income therefrom was capital accretion and was not a revenue receipt. As regards the contention that this amount constituted agricultural income, the Assistant Commissioner observed that as the Income-tax Officer had held, the operations stated in the affidavit of Upadhyaya and relied upon by the assessee would not constitute agricultural operations as they were performed only for the preservation and development of the spontaneous growth which had grown in the forest lands without any human effort or skill. He also observed that no evidence had been brought on record by the assessee to show that there had been cultivation of the soil on which the trees stood and the operations described by the assessee were merely the use of human labour and skill not expended for planting and growing the trees but were merely directed towards preservation and regeneration of the forest trees. On a further appeal to the Tribunal, the Tribunal observed that the fact that the assessee received these forest lands as gift from his father was not in dispute and that, if the forests had remained during the accounting year in exactly the same state as they were at the time of the gift, a sale of a portion of them would have amounted to conversion of the property into money and such sale proceeds could not have been treated as taxable income. But the Tribunal observed that it was conceded that the gift was made a long time ago and that, therefore, between the date of the gift and the year of account, there was or must have been considerable spontaneous growth of trees which became a source of income to the assessee,
6. The Tribunal, therefore, came to the conclusion that since part of the sale would relate to the trees which were in existence at the date of the gift, only two-thirds of the receipts should be treated as income and one third of the receipts should be taken as the sale proceeds of capital assets. Regarding the contention that these receipts should be taken as agricultural income, the Tribunal, following the decision in Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy, rejected the contention on the ground that sufficient evidence was not led by the assessee to show that agricultural operations were carried out on these lands.
7. Now the first contention raised before us by Mr. Dwarkadas was that the sale proceeds of the forest trees and produce were capital and income receipt, that the lands and the trees standing thereon were the subject-matter of the gift in favour of the assessee and that therefore what was sold were the capital assets and the sale proceeds therefore amounted to conversion of part of the capital assets of the assessee. It was further contended that the Tribunal was in error when it held that, out of the amount of Rs. 72,611, trees of the one-third value of it were the original trees while the rest, i.e. of the two-third value, were trees which had spontaneously grown since the date of the gift as there was no evidence before the Tribunal which would justify it to apportion the sale proceeds in the ratio of one-third and two-thirds. It is true that there was no evidence in the shape of any concrete data, such as any inventory of trees, from which the Tribunal could make such an apportionment and there, perhaps, Mr. Dwarkadas is to a certain extent right. But what the Tribunal appears to have done, and which it need not have done, was to say that since part of the proceeds of sale must have been from the trees which were the subject-matter of the gift, the assessee should be given the benefit of doubt by a somewhat ad hoc apportionment. From the findings by the Income-tax Officer and confirmed by the Assistant Commissioner, the Tribunal could well have held that the assessee had not chosen to say which part of the trees represented the trees that were originally standing on the land and which part represented the tree which had spontaneously grown and, therefore, in the absence of any such data of the trees sold being the source of income, the entire proceeds were taxable income. We may observe, and it is conceded before us by Mr. Dwarkadas, that in the returns filed by the assessee, the whole of the amount of Rs. 72,611 was shown as income though the assessee's case was that it was agricultural income, and Rs. 22,950 were claimed as expenses. The fact that these forest lands have been for a long time with the assessee and during that long time, there must have been spontaneous growth on them, was never contested at any stage. The forest lands could not surely have been static in the sense that only the trees received by the assessee as gift together with the lands were the only trees that stood on these lands and nothing thereafter grew on them. What the Tribunal did not these circumstances was that, in its desire to give benefit to the assessee, it recognised the fact that some of the trees sold must have been those which were originally there and, as it would not have been possible, in the absence of any inventories, to apportion them, the Tribunal arrived at a rough and ready apportionment, taking into account the fact that, during the period between the date of the gift and the account year, considerable spontaneous growth of trees must have taken place.
8. Nevertheless, Mr. Dwarkadas's point that the entire sale proceeds, whether they were from the trees which originally stood on these lands or whether they were from those that grew spontaneously after the date of the gift, were receipts would still remain. In our view, however, there is a fundamental fallacy undertaking the contention. There can be no doubt that when these lands together with trees standing thereon were gifted to the assessee, they were so gifted because the trees could be disposed of at some future date and income could be realised therefrom. The trees, therefore, whether those which stood there originally or which grew thereafter, were undoubtedly the source of income and any such income would be taxable income. An identical contention was taken in Raja Bahadur Kamakshya Narain Singh v. Commissioner of Income-tax, where the assessee was assessed for the assessment year 1942-43 on a total sum of Rs. 7,84,565 which included a sum of Rs. 84,993 on account of realised by the sale of forest trees in his zamindari. The assessee's claim that the sale of the forest trees should be treated as sale of capital assets was rejected by the income-tax authorities, and one of the questions referred to the High Court was whether the assessee's net receipt from the sale of forest trees were his income liable to income-tax or were merely capital receipt. A Division Bench of the High Court of Patna consisting of Manohar Lal, Ag. C.J., and Das J. rejected this plea, observing that in Province of Bihar v. Maharaja Pratap Udai Nath Sahi Deo, a Special Bench of that High Court had examined this question and had referred with approval to two decisions of the Madras High Court and a Full Bench decision of the Allahabad High Court and had rejected a similar plea of the assessees there. Another contention which was put forward before the Bench was that the sale of forest trees must necessarily result in the diminution of the value of the assets of the assessee and for that reason the amount realised should be treated as capital receipt. To that contention the reply given by the Division Bench was that such an argument had been unsuccessfully advanced in the cases referred to therein and was similar to the argument advanced on behalf of this very assessee that royalties from coal mine should not be assessed to income-tax as the amount received resulted in diminution of the value of the mine by extracting so much coal therefrom. The High Court held that there was no validity in this contention and that the income-tax authorities had taken a correct view. A similar contention was also raised in Fringford Estates Ltd., Calicut v. Commissioner of Income-tax, where the assessee was a limited company, its main business being to cultivate and sell tea, coffee, etc., in its estate. The company purchased a tract of land part of which had already been cultivated with tea but the rest of it was jungle capable of being cleared and made fit for plantation. The company cleared the jungle of trees in order to make the land fit for cultivation and sold the trees in open market and the accounts of the company showed income of Rs. 11,242 received from sales of timber cut down from the jungle. The clearing operations started in 1938 and the trees that were cut were stocked in the estate of the assessee. In October, 1941, the company entered into an agreement with one Mammu Haji, a timber merchant, for clearing the rest of the jungle of all the trees and for the sale of the timber in the market. The total net realisation of the company from the sale of timber came to Rs. 11,242. Mr. Justice Viswanatha Sastri, who spoke for the Bench, observed that it was not and could not be contended that the income derived from the jungle trees of spontaneous growth was agricultural income. The assessee-company also claimed that this amount was capital receipt and, therefore, was not liable to income-tax as profits or gains. The second contention raised by the company was that the aforesaid receipt was a casual and a non-recurring receipt and therefore exempt from income-tax. The High Court held that these contentions were untenable because profits derived from capital which was consumed or exhausted in the process of realisation were none of the less taxable income and that that proposition had been well-settled since the decision of the House of Lords in Coltness Iron Company v. Black. The High Court also pointed out that this principal had been applied to profits derived from the working of mines and minerals in Raja Bahadur Kamakshya Narain Singh v. Commissioner of Income-tax and nitrate deposits in Alianza Company Limited v. Bell. The High Court also observed that it had been held both in that court as also in the Patna High Court that income derived from the sale of forest trees is not capital receipt and is liable to tax even though there is an exhaustion of capital assets in the shape of valuable and along standing trees.
9. The fact that the amount of Rs. 22,950 was claimed as expenses incurred during the account year and was allowed as such, shows that that amount was expended for foresting the growth of forest on these lands. It is not even the case of the assessee that he was maintaining the forests merely for their own sake and, obviously, the object of spending such a considerable amount was to promote the growth of timber trees on these lands so that at proper times those trees can be disposed of and income therefrom can be realised. The mere fact that such sales would result in the diminution of capital assets, even assuming that the trees are capital assets, would not preclude the sale proceeds from being treated as taxable income. That proposition, as already observed, has been recognised ever since the decision of the House of Lords in Clotness Iron Company v. Black. It is thus clear that the Tribunal could have treated the entire amount of Rs. 49,661 as taxable income and merely because it gave benefit to the assessee to the extent of one-third of it, though no doubt on a somewhat ad hoc calculation, would not confer validity to the contention of Mr. Dwarkadas that the receipt were capital receipts.
10. The second contention urged was that the amount of Rs. 49,661 constituted agricultural income and was, therefore, not liable to tax. Reliance was placed on the decision of the Supreme Court in Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy and especially the observations made therein that if the operations carried out by the assessee constituted an integral agricultural activity, that is to say, the basic operations such as cultivation, tilling, etc., and the subsequent activities, such operations would constitute agricultural operations in regard to forests also. Relying on these observations, it was contended that the affidavit of Upadhyaya, which enumerates the various operations said to have been carried out in the forests of the Bansda State, including these lands, included, amongst other things, planting and dibbling, that these two operations would be the primary or the basic operations and, coupled with the rest, would constitute an integrated activity envisaged in the case of Raja Benoy Kumar Sahas Roy. The argument was that in holding that these activities did not amount to agricultural operations, the Tribunal had failed to take into consideration this part of the affidavit of Upadhyaya and that there was an obvious error on its part in not applying that decision to the facts of the case.
11. It must, however, be remembered that the decision in Raja Benoy Kumar Sahas Roy's case was explained by the Support Court itself in a later case in Commissioner of Income-tax v. Ramakrishna Deo, where it was clearly stated that where an assessee claims that a certain income is agricultural income, the burden is upon him to show that it is so, that is, to establish that he had carried out an integrated agricultural activity as laid down in Raja Benoy Kumar Sahas Roy's case. The question, therefore, is whether the assessee has discharged that burden. Now, it is not in dispute, and cannot be in dispute, that the only proof that the assessee tendered comprised of (a) the fact that he had spent Rs. 22,950 during the account year, and (b) the affidavit of Upadhyaya. But the fact that he had expended Rs. 22,950 in the account year on these forest lands is neither here nor there. As regards the affidavit, that also cannot help the assessee, for, a scrutiny of the affidavit would show that the only things that are stated there are, (1) that the principal income of the Bansda State was derived from forest, (2) that for that reason the State was maintaining a forest staff, (3) that the staff looked after the forests of the State including the forests in these villages, and, lastly, (4) that the duties of the members of that staff were to carry out sylvicultural operations, including marking of coupe, dibbling, planting, weeding, thinning, pruning, digging and doing all types of agricultural operations. The affidavit, however, suffers from two main infirmities, (1) that it talks about the state of affairs existing in and prior to 1942, and not during the account year. That would be so because the deponent was no longer in the service of the Bansda State after 1942, and, therefore, cannot depose to the state of affairs that existed after 1942. The affidavit was made on October 30, 1956, at Songadh where the deponent was serving as a forest ranger, and, therefore, it is somewhat doubtful whether he could remember, after a lapse of about fourteen years or so, the details of duties entrusted to the forest staff of the Bansda State. But the second infirmity is still more substantial, for, the affidavit nowhere states that the duties enumerated there were in fact carried out in those very forests at any point of time. The mere fact, therefore, that staff was maintained by the Bansda State to carry out the operations there set out does not necessarily mean that those operations were in fact carried out in the forest in question or portions thereof. In these circumstances, the Tribunal was right in its conclusion and that conclusion, in our view, was the only conclusion that it could come to, that the assessee had failed to lead satisfactory evidence to discharge the burden to establish that an integrated activity, as laid down by the Supreme Court, was carried out, which included planting and dibbling in these very areas. Neither of the two contentions raised by Mr. Dwarkadas before us can, therefore, be sustained.
12. Our answer to the first question, therefore, must be in the negative.
13. As regards the second question, it has not, in our opinion, been properly framed. The proper question would be :
'Whether, on the facts and in the circumstances of the case, the two-thirds of the sale proceeds of the forest trees and the forest produce treated as income by the Tribunal or any part thereof constituted agricultural income.'
14. Our answer to that question is in the negative. The assessee will pay to the Commissioner the costs of this reference.
15. Questions answered in the negative.