1972 (2) TMI 7 - HC - Income Tax

Adventure in the nature of trade - transaction of cutting and selling the trees - assessee in this case is a registered firm carrying on business in cement and money-lending - assessee did not intend to trade in the sandalwood trees, therefore transaction of cutting and selling the trees will not amount to an adventure in the nature of trade

Summary

Issues Involved:
1. Whether the sale proceeds of sandalwood trees constitute a profit taxable under Section 28 of the Income-tax Act, 1961.
2. Whether the receipt from the sale of sandalwood trees is of a capital nature or revenue nature.

Detailed Analysis:

1. Nature of the Sale Proceeds of Sandalwood Trees:
The primary issue is whether the sale proceeds of the sandalwood trees amount to a profit taxable under Section 28 of the Income-tax Act, 1961. The Tribunal found that the transactions leading to the sale of sandalwood trees were not an adventure in the nature of trade. The assessee, a registered firm, purchased 520 acres of forest land to expand its existing plantation area, not with the intent to resell the land or exploit the forest produce. The sale of sandalwood trees was incidental to the clearing of the land for plantation purposes. The Tribunal concluded that the purchase of land and subsequent sale of sandalwood trees did not constitute an adventure in the nature of trade as the primary motive was to extend the plantation area, not to profit from the forest produce.

2. Capital Nature vs. Revenue Nature of the Receipt:
The second issue is whether the receipt from the sale of sandalwood trees is of a capital nature or revenue nature. The Tribunal held that the receipt was of a capital nature. The assessee's activity of clearing the forest and selling the sandalwood trees was aimed at making the land fit for plantation, thereby enhancing its capital asset. The sale of the trees, including roots and billets, resulted in a net sum of Rs. 55,538. The court referred to the precedent set in Commissioner of Income-tax v. N. T. Patwardhan, where the sale of trees with roots was considered a capital receipt as it affected the capital structure by diminishing the capital assets. The Supreme Court in Vishnudatta Antharjanam v. Commissioner of Agricultural Income-tax also supported this view, stating that the sale of trees uprooted along with their roots, which precluded further growth, was a capital receipt.

Conclusion:
The High Court concluded that the sale proceeds from the sandalwood trees were not taxable under Section 28 of the Income-tax Act, 1961, as the transactions did not constitute an adventure in the nature of trade. Additionally, the receipt was deemed a capital receipt, not a revenue receipt, as it was part of the process of improving the assessee's capital asset, i.e., the plantation land. The court thus answered the reference in favor of the assessee and against the revenue, awarding costs to the assessee.