COMMISSIONER OF INCOME TAX, KERALA v. AMBAT ECHUKUTTY MENON (2)

Citation: [1980] 1 S.C.R. 539

Court: Supreme Court of India

Bench: N.L. UNTWALIA, R.S. PATHAK

Case summary

-These six appeals by special leave preferred by the Commissioner of IncomNax from the judgments of the Kerala High Court are all inter-conriected and arise out of different proceedings in relation to one assessment year only....

Judgment text

COMMISSIONER OF INCOME TAX, KERALA v. AMBAT ECHUKUTTY MENON September 6, 1979 [N. L. UNTWALIA AND R. S. PATHAK, JJ. ] Income Tax Act 1961--Capital Receipt & Revenue Receipt-Sale of trees of spontaneous growth-Purchaser to cut and remove' trunks of trees only-Stumps and roots embedded in soi~ 'not to be disturbed-Proceeds of sale whether liable to be taxed as 'income'. On a vast area of agricultural land owned by' the assessee there were a. bout 772 trees some of which were of spontaneous growth. Clauses 12 and 13 of the agreement by which the assessee sold some trees provided that the trees should be cut without pulling the stumps. The Income Tax Officer, held that the trees were of spontaneous growth and assessed the whole of the income from the sale of trees to income-tax. The Appellate Assistant Commissioner allowed the assessee's appeal in part holding that only the amount actually received during the accounting year, was assessable to income-tax.

Appeals preferred by the assessee as well as the department to thei Income Tax Appellate Tribunal were dismissed but references were made to the High Court on the question whether the receipts from the sale of trees of spontaneous growth were assessable to tax and if so, whether assessable under the head 'other sources'. The High Court held that the receipts from the sale of the trees were of capital nature, and decided the references in favour of the assessee and against the department. • Dismissing the appeals the Court, ,_ HEID : (per Untwalia, J. ) -, (1) The High Court rightly distinguished the decision in V. Venugopala Varma Raiah v. Commissioner of Income-tax, Kerala, 76 ITR 460 and applied • ~e rativ of that in A. K. T. K. M. Vishnudatta Antharjanam v. Commissioner of Agricultural Income Tax, Trivandrum, 78 ITR 58, (549FJ ~ (2) In Venugopala Varma Rajah v.

Commissioner of Income Tax, Kerala, 16 lTR 460, this Court held that if a person sells merely leaves or fruit of the trees 14- or even branches of the trees it would be difficult to hofd that the realization is not of the nature of income. Where the trunks are cut so that the stumps re· main intact and capable of regeneration, receipts from sale of the trunks would be in the nature on income. By selling a part of the trunk, the assessee does not necessarily realise a part of his capital, (546A, D-E] (3) In A. K. T. K. M. Vishnuda/la Anth'arjanam v. Commissioner of Agricultural Income Ta:t1 Trivandrum, 78 ITR 58, a case of sale of. trees with roots. this Court applied the test laid down by the Privy Council in the Cbmmissioner of Income Tax, Bengal v. Mjs. Shaw, Wallace and Co. , 6 ITC 178 and held tha~ "the source is not necessarily one which is expected to be continuously produc.

tive, but it must be one who'se 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. " Although the test laid down by the Privy Council has been whittled down by subsequent pronouncements, yet ill the \. matter of sale of trees when this Court appHed the same test in VishnudaJta's case it was for the purpose of laying stress on the object of the felling of trees. [546G, 547A-Cl (4) If the object of felling the trees leaving the roots and stumps intact is for regeneration of income, lhW. whether income is regenerated or not is immaterial.

But in a case, where the trees are sold by uprooting the roots nobody can say that there could be any object of regeneration of income from the trees growing again as there was no question of a second growth at all. Similarly \Yhen the trees are sold and allowed to be felled by leaving the roots and stuml"' intact then in case of trees of spontaneous growth there is a likelihood of fresh sprouting and further growth of trees on the left out roots and stumps, The presumption in such cases would be that the owner did it with the object of regenerating the incon:ie. There can be cases· like the instant one, where the roots and stumps were not allowed to be uprooted and cut by the licensee or the lessee, yet the object was not the regeneration of the trees, but a protection of the land eventually to be used for the purpose of cultivation.

[547D-FJ In the instant case, tho agreement dated 28-11-1960 indicates that the transaction was not a sale of trees with roots and stumps, for clauses 12 and 13 of the agreement impose a prohibition that after the, cutting, sprouts were not to be cut. The object of the assessee was to protect the land falling vacant after the cutting of the tree. from being damaged by the licensee by at random cutting of the stumps and uprooting of the roots. [547G, 548B-C] (5) In order to net the receipt as a revenue receipt it is for the department to reject the assessee's stand and to hold that the object of the assessee in not allowing the licensee to cut the stumps and uproot the roots was a regenera4 tion of the income. By the time the assessment was completed by the Income Tax Officer an area of ten acres had been converted into cultivable land. [549 E-F] (per Pathak, J. concurring) 1. The instant case does not fall either within V. Venugopala Varma Raiah v.

Commissioner of Income Tax, Kera/a, 16 ! TR 460 or A. K. T. K. M. 'Vishnudatta. Antharja11am v. Commissioner . of Agricultural Income Tax, Trivandrum. 78 ITR 58. It is a case where although the stumps and roots remained after the trees were felled and removed by the purchaser, the regeneration of the trees was not to be allowed and, therefore, a profit-making activity could not be spelled out (5500] 2. Where trees are felled· and removed, the stumps and roots are allowed to remain on the land with a view to regeneration of the trees, the intention of the c. r. T. v. A. ECHUKUTTY (Untwa/ia, !. ) 50 e-wner would be to indulge in a profit-making activity. The receipt from the sale of the trunks would be revenue receipts. [550B] 3. There was no intention in this case to reserve the stumps and roots for the purpose of allowing regeneration of the trees, and the intention and subse· fJ.

Uent conduct of the assessee established that the stipulation against removal of the stumps and roots was intended to protect the surface of the land from indis· criminate injury because the land was1 to be applied, to cultivation. Intention is a material factor in su~h cases, and each case has to be decided on its particular , facts. Without evidence, of the intention or object behind such a stipulation the mere fact that the trees were sold withOut stumpis and roots cannot lead to the necessary inference that a profit making activity was involved. [550C·D] 4. Where the evidence shows that the land has been acquired for the purpose of cultivation, and that the prohibition on the purchaser against removing the C, 1tumps and roots was intended to prevent undue interference with the soil, and the assessee did not intend to permit regeneration of the trees, and.

that he had in fact later put the land to cultivation, the payments received on sale of the trunks cannot be regarded as taxable income. [550E] CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 2242- 2247 of 1972. Appeals by special leave from the Judgment . and Order dated 1-12-1971 of the KeraJa: High Court in Income Tax Ref. No. 29/70, 30/70, 71, 92, 97 and 98/69. P. A. Francis, G. A. Shah and Miss A. Subhashini for the Appellant_ S. T. Desai, Mrs. S. Vaidyalingam, !. B. Dadachanji, Mrs. A. K. Verma and Monje! Kumar for the Respondents. The following Judgments were delivered : UNTWALIA, J. -These six appeals by special leave preferred by the Commissioner of IncomNax from the judgments of the Kerala High Court are all inter-conriected and arise out of different proceedings in relation to one assessment year only. They have, therefore, been -heard together and are being disposed of by this judgment.

The assessee-respondent is a Hindu undivided fainily owning large agricultural lands in the State of Kerala'. In 1905 the faniily purchased in court auction some lands covering an area of about 200 acres. There were two irrigational channels in the land drawing • water from a river. According to the Sanad, there were about 772 trees of various kinds like Karimpana, coconut trees, jack trees, tamarind trees, Maruthu etc. There were other trees of spontaneous growth but they were not in one block. They were intersperse\) ,imong the paddy fields as the land aforesaid was meant for paddy 16--53 ISCI/79 542 SUPREMJ! COUllT REPORTS [1980] 1 s. c. R. cultivation. By an agreement dated November 28, 1960 the assessee sold to one Ve! appa Rowther trees from about 60 acres of land forming part of the 200 acres aforesaid.

Since the original term stipulated in connection with the payment df money by Rowther could ·not be adhered to by him, further agreements were entered into deferring and spreading the payments over some years. The assessee 8 under the impression that the money which it received from 'Rowther on account of sale of trees was not chargeable to income-tax under the. Indian Income. -Tax Act did not file any voluntary return. On February 28, 1963 the Income-Tax Officer, Palghat wrote to the Karanavan of the assessee family pointing out that he had information that the assessee had leased certain private forests to Ve! appa Rowther for cutting timber; and that the assessee had received Rs. 75,000/- durin: the relevant year. The corresponding assessment year would be 1961-62. The assessee was asked to explain why no voluntary ret~ had been filed. In reply to the letter of the Income-Tax Officer the assessee wrote a letter dated the 3rd April,.

1963 stating therein that there was no iease but an out and out sale of the entire standing timber trees except certain specified varieties and that the sale was affect· ed with a view to extend wet or dry cultivation in its fields in the area; the receipt therefrom were of 11.. capital nature or in any event it was an agricultural income. Tho assessee, however, concluded i~ letter by stating that he had no deliberate intention of avoiding to file .. any return. If the Income,. Tax Officer so desired, he was ready te - 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 co11ld produce any income. " I am aware that the test laid down by Sir George Lowndes in Shaw Wallace case has been whittled down to a very large extent by subsequent pronouncements of the Privy Council e. g. in Gopal Saran Narain 2 Singh v. C. I. T. (') and Kamakshya Narain Singh v. C.

l. T. ,( ) yet in the matter of sale of trees when this Court applied the same test in ~. Vishnudatta's case it was for the purpose of laying stress on the object of the felling of the trees. The return may be one and only one. But if the object of felling the trees leaving the roots alld stumps intact is for regeneration of income, then whether income is regenerated or not is immaterial. But in a case where the trees are sold by uprooting the roots no body can say that there coul. d be any object of regeneration of income from the trees growing again as there was no question of second growth at all. Similarly, ordinarily and generally, when the trees are sold and allowed to be felled by leaving the roots and stumps intact then in case of trees of spontaneous growth there is a likelihood of fresh sprouting and further growth of trees on the left out roots and stumps. The presumption in such cases generally would be that · the owner did it with the object of regenerating the income.

But there may be case, although few and far between, like the one with F' which we are concerned here where the roots and stumps were not allowed to be uprooted and cut by the licensee or the Jessee yet the object was not the regeneration of the trees but a protection of the land eventually to be used for the purpose of cultivation. In this background of the Jaw, I now proceed to refer to the special facts of this case. Clauses 12 and 13 of the ageement dated 28. 11. 1960 entered into between the assessee and Velappa Rowther are as follows :- • " (12) The trees in the reared forest have to but cut neatly and the relative stumps should not be either pulled out or cut out. (I) 3 T. T. R. 237. (2) 11 T. T. R. 513 (13) No. 3 should not enter on the lands from where trees are cut or on the sprouts coming up from there. After the cuttings sprouts are not to be cut. " No. 3 referred in clause (13) is the said Rowther.

On the face of the agreement, therefore, the transaction was not a sale of trees wit,h roots and stumps. Rather there was a prohibition that after the cutting, sprouts were not to be cut. The agreement, however, did not indicate as to what was the object of the assessee in incorporating clauses (12) and (13) in the agreement. Was it the regeneration of the trees for earning more income or was it something else ? The subsequent conduct of the assessee as appeared from the facts placed before the Income-tax authorities without anything more will indicate that the object of the assessee was to protect the land falling vacant after the cutting of the trees from being damaged by the licensee by at random cutting of the stumps and uprooting of the roots. The trees sold were spread in an area of 60 acres of land only. Even in that area the trees were not in any thick or contiriuous forest. They were interspersed by paddy fields.

In its very first communication to the Income-Tax Officer sent on 3-4-1963 the assessee perhaps was made aware of the decision of the Kerala High Court in Commissioner of Income-Tax, Kerala v. Venugopala Varma Raia (') which was a case of private fore~t governed by the Madras Act. The assessee, therefore, claimed that there were no private forests in Cochin area of Kerala where the land was situated. The assessee asserted that in substance and in effect the sale was of the entire standing timber i. e. totality of the trees and "the sale was effected with a view to extend wet or dry cultivation to that area as well since the standing trees were a hindrance for such extensions. " In this very letter the assessee also asserted-"This is the very first time that our Thavazhi has sold the 'trees. _. The trees, the subject matter of the sale contract, were there at the • time of the purchase of the agricultural lands by our Tl;avazhi in 1080 M. E. The trees were old trees.

No tree had been sold filter our Thava~i became the owner of the agricultural lands. A large extent of agricultural lands was purchased and these trees formed part and parcel of such holdings. None of us know when the trees began t• • grow. After purchase of the lands we had developed the same and in the process we sold the trees with the object mentioned above. The present sale has been the only sale and it will be the last one also since our idea is to extend ccl. tivation to this area as well. " The Tribunal in its appellate order noticed the argument of the assessee that its sole occupation was agriculture and the attraction in (! ) 67 l. T. R. 802. j C. I. T. v. A. ECHUKUTTY (Untwalia, J. ) 50 the purchase of the land in the year 1905 was two irrigational channels contained therein.

It also noticed the other facts stated in the letter aforesaid of the assessee and finally concluded on the basis of clans~ (12) and (13) of the agreemeht-"If is clear from these that the assessee was reserving to itself the results of the future-growth and a source of income. " The case was squarely covered, in its opinion, by the decision of the Kerala High Court in Venugopala's case. It further observed that the assessee was claiming exemption and it was upto him to furnish all the information as to what trees would not regenerate, what kind of trees were sold etc. The assessee had failed to furnish these details.

Yet it would be noticed that without rejecting the assessee's stand that the transaction in question was the first and the last sille of trees by the assessee and without finding that the object of the assessee was not to convert the land for cultivation but to earn income by regeneration of trees, it upheld the view of the departmental authorities that the receipt was a revenue receipt assessable to income-tax. It -· should be noted that the assessment made was not for default of the assessee to produce any relevant material but a regular assess- • ment on consideration of such materials as were produced by it. It was not asked to produce atiy other evidence or material to substantiate the stand taken by it. Nor was the stand rejected.

In such a situation it was not a question of assessee's claiming any exemption and failing to get it for its alleged failure to furnish any more details_ But it was case where in order to net the receipt as a revenue receipt it was for the departmen\ to reject the assessee's stand ancl to hold that the object of the assessec in not allowing the licensee to cut the stumps and uproot the roots was a regeneration of the income. The High Court has also noticed the fact as found mentioned in the order of the Tribunal that by the time the assessment was completed by the Income-Tax Officer F' an area of 10 acres had been converted into cultivable land.

In our opinion, therefore, the High Court rightly distinguished the decision in Venugopala's case (supra) and ap11licd the ratio of that of Vishnudatta's case (supra)_ As I have observed above the facts of this case were on a line which on the surface was blurred and indistinct, yet, on a careful examination of the matter I find that the dividing line, • though thin, nonetheless, is distinct enough to make this case fit for application of the ratio of the decision of this Court in Vishnudatta's case. I accordingly uphold the view of the High Court • . In the result all the six appeals are dis_missed but on the special facts and circumstances of this case we make no order as to costs in any of them. PATHAK, J. I agree with my learned brother that the appeals Should be dismissed. And I shall set out my reasons. .

A The case is one where trees of spontaneous growth were sold on condition that the purchaser would cut and remove the trunks without disturbing the stumps and roots embedded in the soil. Where trees are so felled and removed, aud the stumps and roots are allowed to remain ill the land with a view to regeneration of the trees, the intention of the owner wonld be to indulge in a profit-making activity, and the case would fall within V. Venugopala Varma Rajah v. Commissioner of ' Income-Tax, Kera/a('). The receipts from sale. of the trunks would be revenue receipts. But in the present case there was no intention to reserve the stumps and roots for the purpose of allowing regeneration of the trees. The intention and subsequent conduct of the assessee establishes that the stipulation against removal of the stumps and roots was intended to protect the surface of the land from indiscriminate injury because the land was to be applied to cultivation.

Intention is a material factor in such cases, and each case has to be decided on its particular facts. Without evidence of the intention or object behind such a stipulation, the mere fact that the trees were sold without stumps and roots cannot lead to the necessary infer~nce that a profitmaking activity was involved. Where the evidence shows that the land had been acquired for the purpose of cnltivation, and that the prohibition on the purchaser against removing the stumps and roots was intended to prevent undue interference with the soil, and the assessee did not intend to"permit regeneration bf the trees, and that he had in fact later put the land to cultivation, the payments received on sale of the trunks cannot be regarded as taxable income. And yet the case is distinguishable from the facts in A. K. T. K. M. Vishnudatta Anthdrjanam v. Commissioner of Agricultural Income-Tax, Trivandrum.

(') - That was a case where the trees were sold with their roots, and it was held by this Court that b"y removal of the roots the source from which the fresh growth of trees could take place had also been removed and, therefore, the sale of such trees effected the capital structure, and could not give rise to a revenue receipt. In my opinion, the present case does not fall either within V. Venugopala Varma Rajah (supra) or A. K. 1'. K. M. Vishnudatta Anthdrjanam (supra). It is a case where although the stump and roots remained after the trees were felled and removed by the purchaser, the regeneration of the trees was not to be allowed and, therefore, a profit-making activity could not be spelled. out. • The appeals are dismissed, but there is no order as to costs. N. V. K. Appeals dismissed:. (I) 76 I. T. R. ~6Ci.