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TMI Blog1955 (4) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... q. miles are protected forest. The gross receipts from forest amounted to ₹ 4,38,894 and the expenses claimed ₹ 1,74,437, leaving a net income of ₹ 2,64,457 subject to allowance for a proportion of land revenue and tribute charges. The income results from sale of timber, lac and other forest produce. The trees include not only teak and sal wood but also other trees whose produce such as myrobalam, tamarind and fire-wood have contributed to the income from forest. No separate figures for the various kinds of timber or forest produce have been furnished. 4. For the assessment year 1942-43 the Income-tax authorities sought to include the income from forest as liable to income-tax. At the assessment stage the Income-tax Officer remarked: "No plantation book nor any working plan for timber plantation has been maintained by the Estate. On the other hand it has been remarked by the Conservator of Forests of Orissa, who was appointed on special duty to survey the forest area of the Estate that 'sylviculture and working plans are conspicuous by their absence..........'. It is also admitted by the Chief Forest Officer at last in writing that the said forests ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal no entries of expenses earlier than February, 1904, were produced, but there were entries from February, 1904, to August, 1905, showing expenditure of very small sums on collection and conveyance of teak seeds etc. The Tribunal held that these operations would be insufficient for planting even a very small portion of the forest areas owned by the assessee and the assessee could not establish in what particular forests or forest areas any particular operation was carried out. Even in respect of the accounting year out of the total expenses claimed amounting to ₹ 1,74,437, the major portion of the expenses was incurred for the maintenance of the forest and general development in the shape of facilities of transport, etc. There was an item of expense under the head "sowing and planting", which on analysis showed only ₹ 77-15-0 as expenses on sowing and planting teak and bamboos. Similarly for the accounting year 1st July, 1941, to 30th June, 1942, the expenditure under the head "sowing and planting" amounting to ₹ 3,550 contained such expenses only to the extent of ₹ 688. 8. Along with the assessee's letter dated 12th November ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter into any contract with the Ceylon Government for the supply of rice but only acted as a miller for the milling of the assessee's paddy and that too under an agreement between the assessee and Jagannadiah. The Dewan's letter dated 3rd June, 1942, contains a definite request for the Estate being allowed to act as the exporter of the surplus of the Upper Division of the Koraput District and not merely of the Estate paddy or rice. In this letter the Dewan also mentioned that though the normal surplus of this area would be 3 lakhs maunds of rice, since the export had already begun, the available quantity would be only about a lakh of maunds. The letter of the Agent of the Government of Ceylon dated 19th July, 1942, is in confirmation of the discussion with the Collector of Koraput and the applicant's Dewan. This refers to the Estate's willingness to place at the Ceylon Government's disposal 1,800 garces of Estate paddy equivalent to 34,000 maund of rice and contains the agreement to supply at ₹ 7-3-0 per maund of rice ex-assessee's Borigumma Rice Mill which was to be worked if necessary in two shifts. There are other details regarding payment on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nother paragraph of this letter referred to the fairness of the present contract entered into through their contractor and assuring that the Estate's part of the contract would always be executed by one of its contractors. On 30th December, 1942, and 31st December, 1942, there were proceedings of the Dewan and the Maharaja leasing out the Estate's Borigumma Rice Mill to Jagannadiah from that date for a period of three years on a monthly rental of ₹ 250. On 28th February, 1943, the Dewan applied for a permit for exporting 50,000 maunds of rice from Borigumma to Bobbili and there were observations that Jagannadiah had undertaken to mill the paddy and deliver the required quantity of rice to the Ceylon Government Outdoor Assistant at Jeypore. On 28th April, 1943, a further proceeding was issued by the Dewan stating that a flat rate of ₹ 135 per garce was payable for paddy to be sold to Jagannadiah. 11. The contention of the assessee was that the supply of rice to the Ceylon Government was to be made only by Jagannadiah and that the assessee was concerned merely with the supply of the requisite paddy to Jagannadiah at a certain rate per garce of paddy. The Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me assessed or the basis of the allowance of the market value of paddy as a deduction. 12. We think questions of law do arise from the order of the Tribunal. The questions formulated are as follows: (1) "Was there any material for the Tribunal to hold that the contract for the supply of rice was entered into by the applicant?" (2) "Whether the sums of ₹ 38,157 and ₹ 6,647 are taxable under the Income-tax Act under the head 'business' for the respective years 1944-45 and 1945-46?" Assessment Year 1945-46. 13. A firm of brokers, Chaudri&Co., arranged for the sale of 50,000 maunds of rice to Messrs. Shaw Wallace&Co., under their sold note dated Calcutta, the 26th June, 1943, in the following terms: "We have this day sold by your order and for your account to Messrs. Shaw Wallace&Co., Produce Department, the following:- "(50,000) fifty thousand maunds average quality Jeypore Estate Raw Rice (as per specification on which sales were made by the sellers to Ceylon Government) at ₹ 20-4-0 (rupees twenty and annas four only) per maund net f.o.r. Bobbili, Rayaghada or Gunnupur. Gunny bags to be supplied by sellers at cost price. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ili the assessee did not dispute the correctness of the market rate allowed as deduction from the sale proceeds of rice in estimating the income. The assessee's contention was that the goods having been despatched to Calcutta the market value of the paddy prevailing at Calcutta should be allowed as deduction and not the market value at Koraput or Bobbili. We think the following question of law arises from the order of the Tribunal:- "Whether in the circumstances of the case the market value of the paddy received by the assessee as rent in kind should be the market value at Calcutta for the purpose of computing the income from the sale of rice to Shaw Wallace&Co., under the provisions of rule 23 of the Income-tax Rules?" Assessment Years 1944-45 and 1946-47. 18. The point involved is whether the contribution of rupees one lakh made annually to the Andhra University in accordance with the terms of the deed dated 6th December, 1933, should be excluded from the assessee's total income. The deed dated 6th December, 1933, is an instrument of gift executed by the present Maharaja granting in perpetuity an annuity of rupees one lakh to the Andhra University. It is cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 65,500. The Income-tax Officer had disallowed the payment, but no ground was taken before the Appellate Assistant Commissioner on this point. Though the Tribunal made a passing reference that the counsel for the assessee did not cite any authority supporting the claim for deduction, the Tribunal refused to go into the matter holding that the assessee was not entitled to raise the question before the Tribunal without having raised the plea before the Appellate Assistant Commissioner. We accordingly refer the following question: "Whether in the circumstances of the case the Tribunal erred in law in refusing to go into the question of the disallowance of ₹ 65,500 paid as damages?" 20. No other points were seriously pressed before the Tribunal. 21. The questions with regard to excess profits tax appeals relate only to profits made from business and they are therefore consequential to the claim of the applicant in respect of their business transactions. 22. The suggestions of the parties were invited on the draft statement of the case and the suggestions made by them were duly gone into at a further hearing. Some changes have been made in the light of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly considered and, therefore, by an order of remand asked the Income-tax Officer to enquire and report about the allegations of the assessee contained in his statement, Exhibit F (printed at page 250 of the paper book) in which the assessee claimed that the Estate had been actively adopting for decades a progressive forest policy and had done a lot of spade-work such as cultivation, settlement and demarcation of boundaries, prevention of theft, timely removal of dead and dying trees so as not to interfere with the proper growth of other trees, protection against fire (and other causes of decay), planting of new trees, growing grass, collection of seeds, replacement of casualties, adoption of improved fellings, clearing of bushes, cutting of climbers, and numerous other operations. The assessee claimed that very large amounts had been spent in replacement, tilling, ploughing, manuring, burning, construction of roads and buildings and making other improvements in the management of the forests. The estate maintained a very big Forest Department under experts. The department consisted of 17 ranges managed by four Sub-Divisional Officers, controlled by a Chief Forest Officer with foreig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1945-46 and 1946-47 during which period the assessee sold rice to the Ceylon Government and made some profits. The assessee's case was that the contract was really between one Jagannadiah and the Ceylon Government and that the assessee was merely helping to bring about the arrangement between the parties. The question of law referred to us is: "Whether the view taken by the Tribunal that the assessee was one of the contracting parties is correct." 4. Similarly, the assessee had business transactions with Messrs. Shaw Wallace & Co., of Calcutta in the assessment year 1945-46 and the question referred to us for opinion is: "Whether the market value of paddy received by the assessee as rent in kind should be the market value at Calcutta for the purpose of computing the income under the provisions of rule 23 of the Indian Income-tax Rules." 5. The fourth question relates to the exemptions claimed by the assessee in respect of the annual grant of ₹ 1,00,000 paid by him to the Andhra University in pursuance of Ext. Z-4, dated 6th December, 1933 (vide page 367 of the paper book). 6. The last question referred to us relates to the exemption claimed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations such as weeding, clearing, cutting back climbers and protection from fire, atmospheric agencies, grazing, insects, fungi and parasites. The Forest Department also takes steps to protect the forests from damage by man through faulty exploitation, prevention of "podu" cultivation, damage by animals, damage by floods, torrents and excessive water in the soil, and prevention of landslides. It is accordingly claimed that there is no virgin forest worth the name and such as there was has been destroyed by the hill tribes, through the process of "podu" cultivation and through indiscriminate cutting down of forest trees. Reliance is also placed on the notes left by Mr. H.G. Turner, I.C.S., in 1872 and quoted in the District Gazetteer: "I can myself call to mind a score of hills that have been completely cleared of forests within five years." The assessee explains how the present forest has grown up. Immediately after the virgin forest had been felled and burnt for the purpose of shifting cultivation, rank grass occupies the area. Before the south-west monsoon sets in the forester sets fire to the whole rank grass, at least once if not twice, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagiri taluk there is sal forest mainly of quality III, but equalling II in places. It is very remote from any market. The sal disappears about 14 miles north of Malkanagiri, giving way to forest of a dry, mixed type. The forest are usually very open and grassy, and economically are of little value except for their excellent grazing. The taluks of Koraput and Pottangi are on an undulating plateau averaging 3000 feet above sea-level and containing peaks above 5000 feet in height. Above 4000 feet there is little forest growth, uncultivated lands being the usual vegetation. Below 4000 feet the vegetation is typically forest wherever the population is scanty. In the more densely populated areas as in the hills to the south of Koraput, repeated shifting cultivation over a long period of years has reduced the forests to an open scrub type or barren soil. The existing forests have all been under shifting cultivation.....Bamboos are common locally, but they are of poor quality and they probably obtained a footing only as a result of shifting cultivation." Referring to the Rayaghada Sub-Division, Mr. Nicholson says: "The forests are of potential economic importance but owing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re felled every eight, ten, or fifteen years and never have a chance of recovering. They have a wretched, stunted appearance, are very dry and more or less impenetrable from a tangled rank undergrowth and there are no seedlings; nothing, in fact, but the coppice growth, generally of only the quicker-growing but poorer sorts of timber." 10. It is therefore extremely hazardous to assume, having regard to the peculiar conditions prevailing in this area, that the entire forest is of spontaneous growth or that the huge Forest Establishment maintained by the Maharaja was merely engaged in preserving what has been saved from destruction by the hillmen. The Income-tax Tribunal appears to have wholly overlooked the effect of "poddu" cultivation on the destruction of virgin forests and on the emergence of new trees whose ages vary from 15 to 20 years. The Tribunal also seems to have made a sweeping assertion that the trees are mature for felling only at the end of forty years, and looked for evidence of actual agricultural operations prior to 1901. While accepting the assessee's contention that the Forest Establishment has been in existence for quite a long time the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e VII shows the steps taken by the estate from time to time for preventing "podu" cultivation and bringing the area under "reserved" and "protected" forests by notification after obtaining the approval of Government. The dead fuel is removed under permits granted to the villagers. Annexure X shows the expenditure by the Forest Department on the plantations. These include clearing, sowing, planting and fire-protection, during the years 1940-41 and 1941-42. Annexure XI shows the expenditure on labour charges for digging, dibbling, etc. Annexure XII contains extracts of entries in the cash books of the Chief Forest Officer for 1920-22, and these show the amounts spent on wages to coolies for uprooting the lanthana shrubs, wages for lopping off musum trees on which lac is grown, charges paid for coppicing stumps, and money spent on various other heads. The Income-tax Officer thought that most of the expenses incurred by the Estate are on maintenance of forests and general development and that the teak and avaram plantations were raised only in sporadic areas where spontaneous growth was not expected. 12. It appears to me that the Department did not attach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me measure of cultivation of the land, some expenditure of skill and labour upon it, it cannot be said to be used for agricultural purposes within the meaning of the Income-tax Act." On the facts of that case their Lordships agreed with the High Court in holding that there was no evidence which would justify the conclusion that this condition was satisfied. It would appear that the income would not be regarded as agricultural income if there is a total absence of some measure of cultivation of the land, or of some expenditure of skill and labour upon it. Their Lordships, however, do not lay down what the measure of that cultivation should be or what the nature of skill and labour expended should be, in order to bring the operations within the meaning of the expression "agricultural purposes" as used in the definition section. "Agricultural income" is defined in section 2 of the Act as- "(a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land revenue in British India, or subject to a local rate assessed and collected by officers of the Crown as such." 13. The question to be determined in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. This case went up to the Privy Council and its decision is reported in Sri Rajah Ravu Venkata Mahipathi Gangadhara Rama Rao Bahadur, Yuvarajah of Pithapuram and Another v. Commissioner of Income-tax, Madras***. It would appear from the judgment that it was admitted in that case that the trees in the forest and non-forest areas had grown wild and that agricultural operations were not carried on in any of the areas from which the income in question was derived. About the same time the Nagpur High Court, in Beohar Singh v. Commissioner of Income-tax#, summed up the position as follows: "This resume will show that so far as forests are concerned the definition we have adopted making actual cultivation with the aid of human skill and labour the dividing line, reconciles, as far as we can see, the various cases which have been cited on the matter of forests." Their Lordships further observed:- "It is essential that the income should be derived from some activity which necessitates the employment of human skill and labour and which is not merely a product of man's neglect or inaction except for the gathering in of the spoils." This case, it should be noted, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f officers, for the proper utilization of the produce of earth. In these circumstances, their Lordships held that there was no escape from the conclusion that the assessee carried on regular operations in forestry. Utilization of land for operations in forestry is therefore an agricultural purpose and tilling of the land is not a conclusive test of such purpose. There is also another case of the Calcutta High Court (Raja Benoy Kumar Sahas Roy v. Commissioner of Income-tax [1951] 19 I.T.R. 379). There it was found that the forest had been in existence for 150 years and that the trees standing on sections of it were sold periodically by rotation. The learned Chief Justice observed thus:- "It can safely be presumed that the trees of which the forest now consists are mostly offshoots sprung and grown from stumps of the original trees after they had been cut down and that some have sprung from the seeds sown. It follows that whether or not the operations of the assessee amount to agriculture, the whole of the income is derived from the land by those operations." The learned Chief Justice concluded with the following words: "I am aware that in some of the decisions w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were of spontaneous growth and there was no planting. The operations in forestry carried on by the assessee were reservation of blocks for operation in rotation, marking of trees fit for selling, creeper and climber cutting, thinning and removal of diseased and unsound trees, clearing of undergrowth, allowing grazing during a certain season, burning of undergrowth and protection from fire. It was held by the majority that though the trees were of spontaneous generation, the operations carried on by the assessee were conductive to the growth and development of the trees and involved expenditure of human skill and labour on the land itself. The land was, therefore, being used for agricultural purposes and the income was held to be agricultural income. 16. Learned counsel for the Income-tax Department drew our attention to the case of Pratap Singh v. Commissioner of Income- tax [1952] 22 I.T.R. 1, a decision of the Allahabad High Court where the more conservative view has been taken. In that case, the Tribunal had not indicated in their statement of the case the manner in which skill and labour were utilised for regeneration and preservation of the trees. Nor had the Tribunal given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Indian Income-tax Act. Where an expression in a taxing statute is of doubtful meaning it must be resolved in favour of the assessee. The burden is on the revenue authorities to show that a certain item of receipt sought to be taxed is, in the first instance, liable to be taxed. The principle deducible from the authorities is that "where an exemption is conferred by statute, the State must not get the tax either directly or indirectly". As was observed by Lord Somervelle (L.J.) in Australian Mutual Provident Fund Society v. Inland Revenue Commissioners*: "The rule must be construed together with the exempting provisions which in our opinion must be regarded as paramount. In so far as the rule, if taken in isolation, would have the effect of indirectly depriving the company of any part of the benefits of the exemption, its operation must be cut down, so as to prevent any such result, and to allow the exemption to operate to its fullest extent." If the tax authorities regard the forest revenue as "income" chargeable to tax under section 4, they should also establish that it is not entitled to exemption under clause (viii) of sub-section (3) of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. That clause reads as follows: "Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them: (i) any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, and in the case of property so held in part only for such purposes, the income applied, or finally set apart for application, thereto." We have gone through Ex. Z-4 dated the 6th December, 1933, the deed of gift executed by the Maharaja of Jeypore (vide page 367 of the printed paper book). It purports to grant an annuity of one lakh of rupees to the Andhra University out of the revenues of the impartible estate. Clause 4 of the deed says that the annuity is charged and secured on the revenues of the impartible estate of Jeypore. There is nothing to indicate that the estate itself was held under trust or other legal obligation for charitable purposes. The exemption clause would apply only if the income in the hands of the Maharaja was derived from property already under trust or other legal obligation. It is unnecessary to go into this point in detail as the question is conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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