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Commissioner of Income-tax Vs. M.S.P. Nadar Sons - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 7 of 1966 (Reference No. 2 of 1966)
Judge
Reported in[1973]87ITR202(Mad)
ActsIncome Tax Act, 1961 - Sections 2(4), 28 and 66(1)
AppellantCommissioner of Income-tax
RespondentM.S.P. Nadar Sons
Appellant AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Respondent AdvocateS. Swaminathan and ;K. Ramagopal, Advs.
Cases ReferredFringford Estates Ltd. v. Commissioner of Income
Excerpt:
direct taxation - adventure in nature of trade - sections 2 (4), 28 and 66 (1) of income tax act, 1961 - whether sale proceeds of sandal wood trees was profit under section 28 - trees in question cut for purpose of raising plantation in area purchased by assessee - motive not to exploit forest or to sell forest produce - cutting and selling trees process of clearing forest and making fit for purpose of plantation - main intention to extend plantation and not to exploit forest - assessee did not intend to trade in forest produce - cutting and selling of trees in question will not constitute adventure in nature of trade. - - the supreme court in that case has clearly ruled that where the question is whether the transaction is in the nature of a trade, the final conclusion of the.....ramanujam, j.1. the assessee in this case is a registered firm carrying on business in cement and money-lending under the name and style of m. s. p. nadar sons, virudhunagar. it also owned large extent of land in yercaud wherein it cultivated coffee, cardamom, etc. on may 14, 1957, it purchased 520 acres of forest land in yercaud for rs. 1,00,000. between 1957 and 1959 it sold 138.12 acres of land out of the total extent purchased for rs. 73,149, as they were in outlying areas and not contiguous to the estates already owned by the assessee. the remaining extent of land which was contiguous to the existing plantation area was cleared by felling and removing the trees therein so as to facilitate cultivation of coffee and cardamom, etc. in the process of clearing, the assessee had to cut 987.....
Judgment:

Ramanujam, J.

1. The assessee in this case is a registered firm carrying on business in cement and money-lending under the name and style of M. S. P. Nadar Sons, Virudhunagar. It also owned large extent of land in Yercaud wherein it cultivated coffee, cardamom, etc. On May 14, 1957, it purchased 520 acres of forest land in Yercaud for Rs. 1,00,000. Between 1957 and 1959 it sold 138.12 acres of land out of the total extent purchased for Rs. 73,149, as they were in outlying areas and not contiguous to the estates already owned by the assessee. The remaining extent of land which was contiguous to the existing plantation area was cleared by felling and removing the trees therein so as to facilitate cultivation of coffee and cardamom, etc. In the process of clearing, the assessee had to cut 987 sandal-wood trees after getting the permission from the District Forest Officer in December, 1960. The assessee incurred expenditure by way of wages for clearing and uprooting the trees and entered into an agreement with one C. R. Nanjundan for the sale of 972 sandalwood trees so cut and uprooted. Under the said agreement the total quantity of the sandalwood including the roots, billets, etc., was estimated at 18 tons and the price agreed was at Rs. 4,500 per ton for roots and billets, and at Rs. 1,500 per ton for the scented chips, and the assessee was to carry out the felling operations at its own cost and get the necessary permits for clearing and removal of the trees. The total quantity of the sandalwood thus sold included the roots and billets of 12 tons and 16 cwts. and scented chips of 4 tons and 14 cwts. and the sale proceeds amounted to Rs. 64,920. The cost of felling operations came to Rs. 9,382 and the assessee thus realised a net sum of Rs. 55,538 from the sandalwood trees.

2. The assessee claimed that the said sum of Rs. 55,538 was a casual receipt and, therefore, exempt from taxation. It also contended alternatively that it was an agricultural income and that it was a capital receipt. The Income-tax Officer took the view that the purchase of the land by the assessee was an adventure in the nature of trade and that the sum of Rs. 55,538 was, therefore, a revenue receipt.

3. The assessee appealed to the Appellate Assistant Commissioner who, however, came to the conclusion that there was no adventure in the nature of trade and that the receipts were of a capital nature. He felt that the assessee's case fell squarely within the ratio of the decision in Commissioner of Income-tax v. N.T. Patwardhan, : [1961]41ITR313(Bom) . The revenue took the matter in appeal to the Tribunal. The Tribunal dismissed the appeal holding, (1) that the surplus realised by the assessee on the sale of sandalwood trees was not a result of any adventure in the nature of trade, and (2) that the receipt was of a capital nature. At the instance of the revenue the following question has been referred to us for decision:

' Whether, on the facts and in the circumstances of the case, the sale proceeds of sandalwood trees was a profit taxable under Section 28 of the Income-tax Act, 1961 '

4. The assessee in this case is neither a dealer in land nor a dealer in timber. The purchase of the land cannot be said to have been made with an exclusive intention to resell at a profit. As a matter of fact, out of the total extent of 520 acres it purchased, it had sold only portions which were in outlying areas not contiguous to the already existing plantation. The area retained has to necessarily be cleared for facilitating the plantation of coffee, cardamom, etc. The clearance of the forest in the lands retained by the assessee was only to make the land fit for plantation and to add the same to the fixed frame-work of the assessee's source of income. It is on these facts that the Tribunal has found that the transactions which had led to the addition of the assessee's fixed asset, that is, existing plantation, cannot be said as an adventure in the nature of trade. The Tribunal also found that there is no material to show that the land was purchased with the sole object of exploiting the sandalwood trees or any forest produce found thereon at the time of the purchase, and that the sole object at the assessee in purchasing the land and in clearing and felling the sandalwood trees therein was only to add to the plantation area already possessed by it. The Tribunal, therefore, found that the process of felling, clearing and sale of the sandalwood trees was not an adventure in the nature of trade. The learned counsel for the revenue contends that the finding of the Tribunal that the sale of the sandalwood trees by the assessee was not an adventure in the nature of trade is not conclusive, that this court has to come to its independent conclusion on a fresh approach to the basic or primary facts found in the case, and that the inference drawn by the Tribunal from the basic or primary facts can always be interfered with if it is found to be unreasonable or perverse. We are of the view that the revenue is right in the above submission. In G. Venkataswamy Naidu & Co. v. Commissioner of Income-tax, : [1959]35ITR594(SC) the Supreme Court, while considering the expression 'adventure in the nature of trade' occurring in the definition of 'business' in Section 2(4) of the Income-tax Act, expressed that the said expression postulates the existence of certain elements in the adventure which in law would invest it with the character of trade or business, and that it would make the question whether a transaction is an adventure in the nature of trade a mixed question of law and fact. The Supreme Court in that case has clearly ruled that where the question is whether the transaction is in the nature of a trade, the final conclusion of the Tribunal can be challenged on the ground that the relevant legal principles have been misapplied by the Tribunal in reaching its decision on that question, and that such a challenge is open under Section 66(1) because it is a challenge on a ground of law. In Commissioner of Income-tax v. Kasturi Estates (P.) Ltd., : [1966]62ITR578(Mad) this court had expressed the view that the findings of fact arrived at by the Tribunal are conclusive and are not open to review under the limited jurisdiction of the High Court on a reference except on a misdirection in law in the process of arriving at them, or on the ground that there was no evidence on which they could be reached, that the conclusion drawn on proved facts or facts as found on evidence is, however, a different matter and that may raise a question of law or a mixed question of law and fact, and that the question whether a certain receipt is realisation of a capital asset, or revenue from trade or business, or from a transaction viewed as an adventure in the nature of trade belongs to the latter category. In Commissioner of Income-tax v. Rajasthan Mines Ltd., : [1970]78ITR45(SC) the Supreme Court again laid down that it is open to the parties to challenge a conclusion of fact drawn by the Tribunal on the ground that it is not supported by any legal evidence or that the impugned conclusion drawn from the relevant facts is not rationally possible, and that if such a plea is established, the court has to consider whether the conclusion in question is not perverse and should not, therefore, be set aside. In Karam Chand Thapar and Bros, P. Ltd. v. Commissioner of Income-tax, : [1971]80ITR167(SC) the Supreme Court had again expressed the view that the question whether a receipt is capital or income or whether a particular receipt is trading profit or a non-trading profit are all questions which, though they may depend to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from proved basic facts. Viscount Simonds in Benmax v. Austin Motor Co. Ltd, [1955] A.C. 370 ; [1955] 2 W.L.R. 579 pointed out the distinction between the finding of a specific fact and finding of fact which is really an inference drawn from facts specifically found, i.e., between the perception and evaluation of facts, and said that in the case of the latter the appellate court will more readily form an independent opinion than in the case of the former which involves the evaluation of the evidence of witnesses.

5. In view of these decisions, we feel that the matter is no longer res integra and the question as to whether a transaction can be viewed as an adventure in the nature of trade is one of law and it is open to the High Court to examine whether the Tribunal had applied the relevant legal principles correctly or not in coming to the conclusion that it is or it is not an adventure in the nature of trade. Therefore, we proceed to consider whether the basic or primary facts found in the case will lead to a reasonable or rational inference that the sale of the sandalwood trees was an adventure in the nature of trade and whether the receipt is in the nature of capital as contended by the assessee or in the nature of revenue as urged by the department.

6. Though the decisions on the question as to what is an adventure in the nature of trade are numerous, none of them has laid down a precise principle of universal application, but various rules have been evolved for guidance. The question, therefore, has to depend to a very great extent on the particular facts of each case, and in the nature of things, it is not possible to lay down any single test as infallible or any single criterion as decisive, and it must ultimately depend on the facts of the particular case, and the decisions bearing on the question are valuable only as indicating the considerations that have to be taken into account in reaching a decision. Lord Radcliffe in Edwards (H.M. Inspector of Taxes) v. Bairstow and Harrison, [1956] A.C. 14 ; [1965] 2 W.L.R. 410 ; 36 T.C. 207 ; 28 I.T.R. 418 expressed that:

' It is a question of law what meaning is to be given to ,the words of the Income Tax Act ' trade, manufacture, adventure or concern in the nature of trade', and for that matter what constitute ' profits or gains' arising from it. Here we have a statutory phrase involving a chasge of tax, and it is for the courts to interpret its meaning, having regard to the context in which it occurs and to the principles which they bring to bear upon the meaning of income. But, that being said, the law does not supply a precise definition of the word ' trade': much less does it prescribe a detailed or exhaustive set of rules for application to any particular set of circumstances.'

7. Lord Denning in J.P. Harrison (Whalford) Ltd. v. Griffiths, [1963] A.C. 1 ; [1962] 40 T.C. 281 ; [1965] 58 I.T.R. 328 said that ' the word ' trade ' is one of those common English words which do not lend themselves readily to definition but which all of us think we understand well enough. We can recognise a ' trade ' when we see it, and also an ' adventure in the nature of trade.' But, we are hard-pressed to define it.'

8. The revenue contends that the cutting and sale of the sandalwood trees by the assessee will partake the character of a trade or business in view of the following circumstances. The assessee is already carrying on plantation--an income earning activity; the assessee is a firm constituted for carrying on business with the sole and specific object of earning profit and whatever the firm does should be taken to be with the object of business or a commercial motive. Though the main business of the assessee-firm was to carry on plantation operations, the incidental activity of cutting and sale of the sandalwood trees partakes the character of the commercial venture; the sandalwood trees cut are eminently a fit commodity for trading in the market, the assessee's sole intention cannot be said to be the clearance of the forest for facilitating its plantation operations, and no permission has been taken from the forest department to clear the forest as such apart: from cutting the sandalwood. There is no evidence that the forest as such was cleared apart from the cutting operations, is also indicative that the assessee's intention is to get the maximum price for the trees cut. The transaction of cutting and sale of the sandalwood trees by different categories such as roots, billets, and scented chips, etc., cannot be said to be of a casual or isolated transaction.

9. As against these circumstances which have been pressed into service by the revenue in support of its contention that the cutting and selling operations in relation to the sandalwood trees amounted to either a trade or an adventure in the nature of trade, the learned counsel for the assessee submits that the process of expansion of its already existing area of plantation cannot be said to be in itself a trade or an adventure in the nature of trade, though the plantation itself is a business of the assessee, that the assessee's intention in purchasing the land with a view to extend its plantation area cannot be ignored or overlooked, that the operation of cutting and sale of the sandalwood trees.done by the assessee in the process of clearing the forest to make the land fit for plantation cannot be treated as a separate activity of the assessee alleged to have been carried on with the sole object of earning a profit by sale of the trees, and that in view of the finding of the Tribunal that the sole object of purchasing the land and clearing the forest was to add to the plantation area possessed by the assessee and not to exploit the sandalwood trees or any produce found thereon, the clearance and the sale of the sandalwood trees done with a view to add to the existing framework of the assessee's source of income cannot be treated either as trade or as an adventure in the nature of trade.

10. It is well-established that the characteristics which make a particular transaction an adventure in the nature of trade cannot precisely be defined or set out and that the question will have to depend on the circumstances of each case. As pointed out in Commissioner of Income-tax v. Kasturi Estates (P.) Ltd., an adventure in the nature of the trade cannot be itself called or described as trade but all the elements of trade which is of a wider concept should obviously imply themselves--some at least--and a transaction to be an adventure in the nature of trade should be a plunge in the waters of trade and therefore, the transaction itself should be looked at to see if it is essentially of a commercial character.

11. The Royal Commission on ' the Taxation of Profits and Income ' found considerable difficulty in propounding a general rule to find out whether a transaction was in the nature of trade or business but summarised the following as what they regarded as the major relevant circumstances for considering whether the transaction bears any of the ' badges of trade '.

1. The subject-matter of the realisation.

2. The length of the period of ownership.

3. The frequency or number of similar transactions by the same person.

4. Supplementary work on or in connection with the property realised.

5. The circumstances that were responsible for the realisation, and

6. The motive of entering into the transaction.

12. The above considerations though not exhaustive are quite useful in arriving at a conclusion on the nature of the transaction and the income realised out of the same. In Hudson's Bay Co. Ltd. v. Stevens, [1909] 5 T.C. 424 Farwell L.J. stated:

' It is clear, therefore, that a man who sells his land, or pictures, or jewels, is not chargeable with income-tax on the purchase money or on the difference between the amount that he gave and the amount that he received from them. But, if instead of dealing with his property as owner he embarks on a trade in which he uses that property for the purposes of his trade, then he becomes liable to pay, not on the excess of sale prices over purchase prices, but on the annual profits or gains arising from such trade, in ascertaining which those prices will no doubt come into consideration.'

13. In C.H. Rand v. Alberni Land Company Ltd., [1920] 7 T.C. 629 Rowlatt J. has stated :

' If a land-owner, finding his property appreciating in value, sells partof it, and uses part of his money still further to develop the remainingparts, and so on, he is not carrying on a trade or business; he is only property developing and realising his land.'

14. In Roberts v. Lord Belhaven's Executors, [1925] 9 T.C. 501 it was expressed :

'It is, of course, true that a particular seller may be carrying on a trade or business in buying and selling land, stocks and shares, etc., so as to bring under taxation the profits or gains he thereby makes, as distinguished from the prices he receives; but that is a different matter. Whether such a trade or business is being carried on or not must often depend on considerations of degree and circumstance.'

15. In Leeming v. Jones, [1930] 15 T.C. 333 (H.L.) it was stated that, in order to attract tax liability under Clause 1 of Schedule D (corresponding to Section 2(4) of the Income-tax Act, 1922), one at least of the four conditions must be present, namely, (1) the existence of an organisation, (2) activities which led to the maturing of the assets to be sold, (3) the existence of special skill, opportunities, in connection with the article dealt with, or (4) that the nature of the asset itself should lend itself to commercial transactions. The Exchequer Court of Canada in Regal Heights Ltd. v. Minister of National Revenue, [1960] CTC 194 referred to the usual badges of trade such as (1) presence of organisation set up for the purpose of trade, (2) multiplicity of transactions, (3) prior association of the business, and (4) existence of a scheme, system, business or operation, and stated that ' trade is not the same thing as ' an adventure in the nature of trade', and that a single transaction may well be the latter without being the former, provided it is essentially commercial, and that the absence of one or all of the usual badges of trade does not negative the existence of an adventure in the nature of trade.'

16. In G. Venkataswami Naidu & Co. v. Commissioner of Income-tax, : [1959]35ITR594(SC) their Lordships of the Supreme Court had expressed the view that Section 2(4) of the Income-tax Act which refers to an adventure in the nature of trade clearly suggests that the transaction in question cannot properly be regarded as trade or business, that it is allied to transactions that constitute trade or business, that even an isolated transaction can satisfy the description of an adventure in the nature of trade provided at least some of the essential features of trade are present in the isolated or single transaction and in deciding whether such a transaction amounted to an adventure in the nature of trade, several factors are relevant, such as, e.g., whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it, the nature and quantity of the commodity purchased and resold; and the act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable ; any act prior to the purchase showing a design or purpose ; the incidents associated with the purchase and resale; the similarity of the transaction to operations usually associated with trade or business, the repetition of the transaction, and the element of pride of possession. The Supreme Court was of the view that the presence of all these relevant factors may help the court to draw an inference that the transaction is an adventure in the nature of trade but it is not a matter of merely counting the number of factors and circumstances pro and con, and what is important to consider is their distinctive character and it is the total effect of all relevant factors and circumstances that determines the character of the transaction. In Commissioner of Income-tax v. Kasturi Estates (P.) Ltd., where the land-owner developed his land, expended money on it, laid roads and converted the land into house sites and, with a view to get a better price for the land eventually sold the plots for a consideration yielding a surplus, this court held that the said activity cannot be said to be an adventure in the nature of trade, that it is only a realisation of a capital investment or conversion of one form of asset into another, and the fact that such an activity was carried on by a company which has among its objects power to trade or traffic in land will not make any difference. In P.M. Mohammed Meerakhan v. Commissioner of Income-tax, : [1969]73ITR735(SC) the assessee agreed to purchase a vast extent of land, the agreement providing that the sale deed is to be executed by the vendor either in favour of the assessee or his nominee. Thereafter he divided the same into 23 plots and sold 22 plots to others and retained the 23rd plot. It was held by the Supreme Court that the business of the assessee constituted an adventure in the nature of trade as the assessee had intended while purchasing the estate to resell the same at profit as he did not have the necessary resources to buy or cultivate the estate himself. It was expressed in that case that it is not possible to evolve any single legal test or formula which can be applied in determining whether the transaction is an adventure in the nature of trade or not land that the answer to the question must necessarily depend in each case on the total impression and effect of all the relevant facts and circumstances proved therein.

17. In this case the primary facts found by the Tribunal are that the assessee purchased the forest land for the purpose of extending his plantation area, and while reclaiming the same for the purpose of raising plantation therein he had to cut the trees in question. The motive in purchasing the land is not to exploit the forest and to sell the forest produce. The fact that the assessee sold the outlying areas which are not convenient and suitable for expansion of his plantation shows that his object is to expand plantation operations and not purchase the forest and exploit the same. The fact that the assessee happens to be a partnership with an avowed object of carrying on a business will not ipso facto make the activity of cutting and sale of the trees, in the process of clearing the forest, a business venture, for the partnership has been constituted only for carrying on the business of plantation, and the cutting and sale of the trees was only in the process of clearing the forest and making it fit for plantation. Though the motive or intention to trade at the time of acquiring the asset is not decisive, it cannot altogether be ignored in deciding the question as to whether a particular transaction amounted to an adventure in the nature of trade. As the assessee's main intention was to extend his plantation and not to exploit the forest, we are of the view that the assessee did not intend to trade in the forest produce such as sandalwood trees.

18. Though the learned counsel for the revenue attempted to bring in the transaction of cutting and sale of the sandalwood trees as part of the assessee's main business of plantation and the sale value of the trees cut and sold as income from the assessee's business of plantation, we are not inclined to accept that case. As a matter of fact, the department had at all stages proceeded on the basis that the transaction is an adventure in the nature of trade and not that it really constituted part of the assessee's business. We are also not inclined to agree with the contention advanced on behalf of the revenue that the assessee should be deemed to have been aware of the existence of the forest produce in the land and the likelihood or the possibility of the sale value of the forest produce being received by him and that, therefore, he should be deemed to have had the intention to trade in forest produce. As has been held in Commissioners of Inland Revenue v. Reinhold, [1953] 34 T.C. 589 the fact that the property was purchased with a view -to resale did not of itself establish that the transaction was an adventure in the nature of trade and that the profits arising therefrom are chargeable to tax. It is the cumulative effect of all the circumstances that has to be considered in determining the question as to whether the transaction in question was an adventure in the nature of trade. In our view, all the circumstances in this case indicate that the assessee did not carry on the activity of cutting and sale of the trees either as a business venture or as an adventure in the nature of trade. It cannot be said to be a plunge in the waters of trade nor it has any of the badges of trade. The assessee, with a view to improve his capital asset, that is, the plantation, cleared the forest arid sold the forest produce, that is, the sandalwood trees, and this will not lead to the inference that the assessee had intended to trade in the forest produce. We are, therefore, of the view that the transaction of cutting and sale of the forest trees will not constitute an adventure in the nature of trade.

19. Then we proceed to consider the question whether the receipt in question is capital or revenue. If it is capital receipt the revenue cannot tax the same. On the facts found it is seen that the sandalwood trees in question have been uprooted. In Commissioner of Income-tax v. N. T. Patwardhan, the Bombay High Court held that by the sale once and for all of the trees with roots which were the assessee's assets, even though he did not invest any capital in growing them, the capital structure of the assessee was affected and there was a diminution in his capital assets and, therefore, the receipts from the sale of the trees were capital in nature. The above decision was cited with approval by the Supreme Court in Vishnudatta Antharjanam v. Commissioner of Agricultural Income-tax, : [1970]78ITR58(SC) . In that case where the trees had been cut and completely removed from the land together with their roots for the purpose of planting the areas with rubber, it was held that the sale of the trees affected the capital structure, because by removing the roots the source from which fresh growth of trees could take place was removed, and that; therefore, the sale could not give rise to a revenue receipt, and the receipt from the sale of the trees was capital in nature. It was also laid down in that case that profit motive is not decisive of the question whether a particular receipt is capital or income and that the accretion to capital does not become taxable income merely because an asset is acquired in the hope that it may be sold at a profit. In Consolidated Coffee Estates (1943) Ltd. v. Commissioner of Agricultural Income-tax, : [1970]76ITR29(KAR) the Mysore High Court in dealing with a case of the cutting and sale of shade trees in a coffee estate held that as the trees were part of the fixed assets of the planter, the proceeds of sale of timber of the shade trees is a capital receipt and not taxable as income. State of Kerala v. Karimtharuvi Tea Estate Ltd., : [1966]60ITR275(SC) was a case where the assessee who carried on the business of manufacturing and selling tea, grew grevelia trees in its tea estates solely for the purpose of affording shade to the tea bushes and when the trees became useless by efflux of time cut them down and sold. The question was whether the proceeds derived by the sale of grevelia tree so cut did constitute agricultural income under the Kerala Agricultural Income-tax Act, 1950. The Supreme Court expressed the view that the receipt would not constitute agricultural income as grevelia trees in the tea estate constituted capital assets and the proceeds derived therefrom was a capital receipt. In Kaloogate Estate, Namunugala (Ceylon) v. Commissioner of Income-tax, : [1973]87ITR215(Mad) (Appendix) infra the assessee had purchased a rubber estate in 1941 and had been deriving income from the rubber trees in the years earlier to the assessment year 1954-55. In the assessment year some of the trees which had ceased to be productive were cut and utilised as fuel. The question was whether the value of the trees cut and utilised as fuel is a revenue receipt. This court held that as the trees were not cut down immediately on the purchase of the estate so as to result in a recovery of part of the capital invested, and the trees were maintained and income realised from the product of these trees for several years, the case was parallel to the acquisition of jungle from which trees were cut periodically either for the purposes of timber or fuel and that, therefore, the receipt should be treated as of a revenue nature. But, the above decision does not appear to be in accord with the later decision rendered by the Supreme Court in Commissioner of Agricultural Income-tax v. Kailas Rubber & Co. Ltd., : [1966]60ITR435(SC) There the assessee purchased a rubber estate with the rubber trees planted thereon for the purpose of deriving income in the shape of latex and after the rubber trees ceased to yield any further and became useless they were cut and sold by the assessee. Their Lordships of the Supreme Court held that the sale proceeds of old and unyielding rubber trees were capital receipts and not taxable as agricultural income under the Kerala Agricultural Income-tax Act, 1950. In Elixir Plantations Ltd. v. Commissioner of Income-tax, : [1969]71ITR741(Ker) (Appendix) when the dead and wind fallen trees in a coffee estate were cut and sold leaving no chance of further income therefrom, the sale proceeds of the same were treated as of a capital nature and this decision accepted the principle laid down in Commissioner of Income-tax v. N. T. Patwardhan which was later approved by the Supreme Court in Vishnudatta Antharjanam v. Commissioner of Agricultural Income-tax.

20. The learned counsel for the revenue however draws our attention to a decision of this court in Manavedan Tirumalpad v. Commissioner of Income-tax, [1930] 4 I.T.C. 421. In that case certain sums received by sale of timber trees on unassessed forest lands were taken as income chargeable to income-tax. That decision, in our view, has no application to the facts of the present case. That decision was concerned with a case where a person owning the forest land was exploiting the forest by cutting or removing the trees and other forest produce. The contention put forward by the assessee in that case was that cutting down and carrying away the trees from the forest resulted in depletion of the capital and, therefore, should be treated as a capital receipt. But, that contention was rejected as the learned judges saw no distinction between the facts in that case and cases where income is derived from the sale of paddy which is grown on land, the sale of coal in a coal mine and sale of stone quarried in a quarry. The revenue also takes support from the decision of this .court in Fringford Estates Ltd. v. Commissioner of Income-tax, : [1951]20ITR385(Mad) In that case the assessee purchased a tract of land part of which had already been cultivated with tea and the rest of which was jungle capable of being cleared and made fit for plantation. The assessee began clearing the jungle and trees in order to make the land fit for cultivation. Subsequently, it entered into an agreement with a timber merchant for clearing the rest of the jungle and for the sale of the trees cut in the market. The assessee claimed the sale value of the timber as a capital receipt. It was held in that case that the profits realised from the sale of timber were trading profits and were liable to income-tax. But, in our view, the facts in that case are distinguishable. In that case the cutting operations went on for a period of three years and the timber cut was made marketable and sent to a place which was a centre of timber trade and sold in open market. It is in these circumstances the court held that the sale proceeds of timber was a trading receipt. In this case the revenue has proceeded only on the basis that the sale of trees by the assessee is an adventure in the nature of trade and not that it is part of the business Therefore, the principle laid down in that decision cannot be applied in this case. It is not the case of the revenue that the assessee's intention at the time of the purchase was to retain the forest and exploit the same. If the assessee intended to retain the forest and to exploit the same and receive income therefrom it could be said, by applying the above decision, that the receipts by sale of the sandalwood trees would amount to a revenue receipt. But that is not the case here. Here the sole aim of the assessee was to extend his plantation and he had no intention to keep the forest land as such and receive income therefrom. As a matter of fact, by cutting and the sale of the sandalwood trees the assessee had recovered a part of capital which he had invested. In the special circumstances of this case, we are of the view that the receipt is in the nature of a capital and not in the nature of a revenue.

21. We therefore answer the reference in favour of the assessee and against the revenue. The assessee will have its costs. Counsel's fees Rs. 25Q.


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