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TMI Blog1944 (9) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... sessable income of the assessee in the original assessment for the year 1938-39. This position, however, was received by Mr. N.H. Naqvi, Income-tax Officer, Gonda, who reopened the assessment for the year 1938-39 and by his order dated 27th February 1940 held receipts from the sale of forest trees to be the taxable income of the assessee. From this order of the Income-tax Officer the assessee appealed to the Appellate Assistant Commissioner of Income-tax, Lucknow, who by his order dated 31st March 1941 confirmed the assessment. 3. From the order of the Appellate Assistant Commissioner an appeal was preferred to the Tribunal which was heard by a Full Bench of three Members who agreed in dismissing the appeal. 4. The assessee has now applied to the Tribunal under Section 66 (1) of the Income-tax Act requiring it to state to the Chief Court of Oudh at Lucknow the following questions: "(1) That the consideration received from the sale of the forest was not "income" within the meaning of the Income-tax Act. (2) That as a general proposition income from the sale of trees grown or land inherited, purchased or acquired by gift or legacy is not taxable under the Act. (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4 is in the form of a ground of appeal and can obviously not be referred. 9. Questions Nos. 1, 2, and 3 as formulated by the assessee raise the point whether receipts from the sale of forest trees are income or capital. We agree that in the circumstances of this case the question is one of law and that we must state it to the Chief Court. 10. In the order under Section 33 the Bench has found:- (1) that the land on which the forest trees grew was granted by the British Government to the assessee in full proprietary right and not on the condition that he would clear the jungle and bring the land under cultivation within a particular time or at any time; and (2) that the forest had since long been worked by the assessee in accordance with a scheme of profit making and that the assessee had been expending substantial amounts in the maintenance of the forest and deriving regular income therefrom. On these findings the question that arises and which we refer to the Chief Court is:- Whether the assessee's net receipts from the sale of forest trees were the assessee's income liable to income-tax or merely capita l converted into cash and not liable to income-tax. 11. Quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 13. The assessee's Counsel admits that the third point, which of course is a question of fact, urged before the Tribunal in the appeal under Section 33, namely, that the income is of a casual and non-recurring nature, has not been formulated in the application for reference. Notwithstanding this, however, if a question on this part of the case had arisen out of the order of the Bench under Section 33 we would have stated it to the Chief Court if the assessee at the hearing of the application for reference had indicated to us the precise question of law that arose in the case and satisfied us that the omission to formulate the question in the application was inadvertent. But all that counsel could say at the hearing of the application was that in the period intervening between Mr. Harrison's Report of the Second Settlement (1898) and the commencement of the cutting of the forest in 1928 there is nothing to show that the forest was being worked in accordance with a scheme of profit making. But surely if the jungle was being worked according to a scheme up to 1898, in the absence of evidence to the contrary, there is a presumption, which in this case is confirmed by the sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant which contains a full history of this Estate. It appears from that report that the Raja-i-Rajgan of Kapurthala after the Mutiny was granted by the British government 56 wiran villages to hold them in proprietary right in reward for his services. With the promulgation of the Oudh Waste Rules according to which all waste belonged to Government, a question arose whether the forest lands in question were included in the Raja's Sanad and were thus the Raja's property or whether they should be treated as belonging to Government to be dealt with under the Oudh Waste Rules. After a good deal of correspondence between the Raja and the Government, the claim of Government to such forest lands was withdrawn and the Raja's title to it recognised. The report makes it clear that it had never been a condition of the grant that the Raja was to bring the waste under cultivation or lose the land. The following quotations from the report put the position beyond all doubt:- "I may also refer in this place to a question which has been raised in the district regarding the obligation on the Raja of Kapurthala to clear the forest land. The history of the matter seems to be that cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of it can now be taken away without giving the Raja good reason for complaining that the conditions of the grant have been infringed. The Chief Commissioner agrees with you and the Commissioner in thinking that the interest of the public are, to say the least, quite as likely to be well promoted by leaving the lands with the Raja, as they would be by giving them to any auction purchaser under the waste land rules.": Letter No. 1861, from the Secretary to the Chief Commissioner of Oudh to the Financial Commissioner, Oudh, dated 11th May 1866, at page 23. These extracts from the Settlement Report make it perfectly clear that the land was granted to the Raja without any condition or qualification and was intended to be enjoyed by him in any way he chose fit, there being no obligation on him to bring it under cultivation within a particulars time or at any time. If the land had been granted to the Raja on the condition that within a specified time he would clear the jungle to make the land arable, the receipts from the sale of the jungle trees thus removed would perhaps not have been taxable; but the grant not being subject to any such condition it appears to me that this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven to the appellant company, but was one under which they obtained an interest in, and possession of, land. So long as the timber, at the opinion of the company, remained upon the soil, it derived its sustenance and nutriment from it. The additional growths became ipso jure the property of the company. All rights of possession necessary for working the business of cutting or even for preserving uninjured the standing and growing stock of timber were ceded under the leases. All this, together with the business facilities for removal and sale, was granted to the company, which became thereby invested with the possession of and an interest in, the land. This was so, undoubtedly, in a practical and, indeed, very ample sense, and, in the opinion of the Board, it was so also in the eye of the law. "So far for the view of the common law. From the point of view of accounting and finance, the matter appears equally clear. There can be no question that the cost of acquisition of this possession of and interest in, land and of the timber rights thereon, was just as plainly a capital on cost as if the land, with the timber upon it, had been bought outright. And just as plainly it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of timber trees of unassessed forest lands are income chargeable to revenue. It is true that the forest land in the Madras case was unassessed to land revenue; but the point is of no importance as the fact of the land being assessed to land revenue or not is not relevant to the question whether receipts from the sale of growing timber are capital or revenue but is only relevant to the question whe- ther the income is agricultural, and in this case, as I shall show later, though the land is assessed to land revenue, nevertheless the income from the sale of timber growing thereon is not agricultural income. The same view of income from Bankar, i.e., income from the sale of wood from jungle has been taken in a recent Patna case reported as Province of Bihar v. Maharaja Pratap Udai Nath 9. It is true that in the New Zealand case certainly, and in the Madras case probably, the assessee was carrying on business in timber; but, as will presently be shown, in the present case also the forests have since long been worked in accordance with the scheme of profit making so that the cases cited do not really suggest any point of distinction. 10. On the principles stated and the authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is "Agricultural income" within the meaning of clause (a) of sub-section (1) of Section 2 of the Income-tax Act and therefore exempt from tax under Section 4 (3) (viii) of that Act. Clause (a) of sub-section (1) of Section 2 is as follows:- "'Agricultural income' means 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." It is clear that in order to constitute "agricultural income" the revenue in question must be derived form land which is used for agricultural purposes; and, secondly, the land must be such as is assessed to land revenue. The respondent and the Appellate Assistant Commissioner have devoted a large part of their orders to a consideration of the question whether the land is assessed to land revenue or not and have both found that it is not so assessed. In deciding this short question they have indulged in lengthy discussions about the land revenue policy of the Government and the method of assessing land. We have not the least doubt that, in assuming and emphas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work the forests at any great profit. When it came into possession it found them in a very deteriorated condition and has now, for may years past, been working over them in accordance with a regular working plan. There is no good market for fellings, the trees being of inferior quality, and firewood finds but a scanty sale. Large quantities of useful timber are supplied free to the estate tenantry who are also allowed free grazing, and thatching grass, which is abundant, is the only product which alone brings in any considerable income. Fortunately it has not been necessary for me to make an estimate of the profits, for by the courtesy of Mr. A.R. Wood, the Manager of the Oudh Estates of His Highness the Raja-i-Rajagan of Kapurthala, I have been supplied with accurate abstracts from the estate accounts for 13 years. This is a sufficiently long period to form the basis of an assessment. I have also been able to ascertain from the patwaris the exact areas under trees and under grass respectively and by comparing these area statements with the estate accounts I have been able to deduce rates for the valuation of the tree and grass areas respectively. Thus I find the forest area to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revenue agricultural income. the assessee claiming exemption for any income on the ground of its being agricultural income has to show further that the land yielding the revenue is being used for agricultural purposes. In the Income Tax Manual income received by a land owner from the sale of timber of leaf grown on his own land is cited as an instance of agricultural income. This instance tends to show that regular forestry or sylviculture is, according to the view of the annotator of the Manual, included in the term "Agriculture", But, in my opinion, even where trees are grown and cut by the owner of the land according to strict botanical principles the operation is not agricultural. In the case of land occupied by a grove it has been held by a Full Bench of the Allahabad High Court and by the Privy Council on appeal from that case* that land granted by a zamindar for the purpose of planting a grove is not land let for agricultural purposes within the meaning of the United Provinces Tenancy Act. In that case the question was whether a suit by a grove-holder who was unlawfully ejected by the zamindar from his grove was a revenue suit that should have been brought under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est guards appear to have been employed to protect the property, but it cannot be said that the trees have grown as the result of cultivation. They appear to have grown naturally in the jungles without the intervention of human agency, and in my view the growth of these trees cannot be said to be the result of cultivation of the soil. In fact, it was the absence of cultivation that permitted the area to develop into a jungle." In the present case though Babu Harcharan Dass, Head Clerk of the Estate, has stated that an expense of about ₹ 2,000 a month from 1886 up to 1932 and thereafter of about ₹ 200 a month was incurred in protecting and maintaining the forest and the report of Mr. Harrison, Settlement Officer, recites that the forest is being worked according to a plan, it is definitely admitted before us by counsel and other representatives of the appellant that the forest was a spontaneous growth and that nothing in the nature of preparing the land for the growth of the trees was done. For this reason also is cannot be held that the income from forest was attributable to any agricultural operations. Thus, though I have held that the land on which the forest gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the sale of timber amounted to ₹ 1,03,785, and that he allowed a ten per cent, deduction from this (Rs.10,378) on account of "expenses relating to forests." It is stated in the order that income from the sale of timber trees had never been included in the "sewai" income and that the area covered by timber trees had always been excluded from land revenue assessment. It was for these reasons that the Income- tax Officer held that the income was liable to income-tax. In-appeal the Assistant Commissioner discussed both these points in his order of 31st March 1941, and, agreeing with the Income-tax Officer, upheld the assessment. The Tribunal, to which the assessee went in further appeal, did not agree on either point. The settlement to be considered was that of 1898, the current settlement only coming into force in 1938. On the first point they observed that extracts from the report of the second settlement, which they quoted, showed that income from the sale of timber was also taken into consideration in settling the land revenue; and on the second that "It is abundantly clear fram the entries in the Mabalwar Assessment Statement and the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or legacy." As regards the character of the forest land and its management we may quote an extract from the Settlement Report of 1898 : " These forests consist mainly of inferior sal trees, with miscellaneous patches on the outskirts, and extensive grass savannahs. The estate does not at present work the forests at any great profit. When it came into possession it found them in a very deteriorated condition and has now for many years past been working over them in accordance with a regular working-plan. There is not good market for fellings, the trees being of inferior quality, and firewood finds but a scanty sale. Large quantities of useful timber are supplied free to the estate tenantry who are also allowed free grazing, and thatching grass, which is abundant, is the only product which alone brings in any considerable income." The net annual profit over a period of 13 years was found to be ₹ 2,131 from grass and ₹ 4,425 from trees covered land. The position appears to have remained much the same until 1928 when wholesale cutting commenced with a view to clearing the forest in order to make the land arable. During the next ten years the whole forest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ascertainment of profits as a revenue debit." Referring to the case in Coltness Iron Co. v. Black* and in Alianza Co. v. Bell, he observed: "The law-so clearly settled with regard to the working of coal and of nitrates, and settled upon a broad general principle-is in no way different when it comes to be applied to timber-bearing lands." And at the end of the judgment we find the following observations: "Nor is it necessary to add that this mode of treating timber or mineral for taxation purposes contains nothing novel. For it has long been the law of the United Kingdom that the exhaustion of capital, however it might be treated on strict actuarial principles or according to certain principles of economics, may for the purposes of taxation be treated as profit. That profit may be temporary, and so when it ceases the capital may be gone, and with the going of the capital there will also go the subject and the possibility of the tax." The question was briefly considered by the Madras High Court in Commissioner of Income-tax, Madras v. Manavedan Tirumalpad***, where the purchaser of a forest which was gradually exhausted by fellings objected to bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. Under this provision any receipts, not being receipts arising from business, which are of a casual and non-recurring nature are exempted. The Tribunal repelled this contention, referring to the Settlement Report of 1891 as showing that the forest had been regularly worked and to the fact that the revenue had been received from it, at least since 1885. The learned counsel for the assessee conceded that the forest was worked as a business up till 1928 and that the only reason why income-tax should not have been assessed upon the revenue received in the preceding years that could be put forward is that this revenue was derived from land used for agricultural purposes, but he argued that the business ceased in 1928, when it was decided to commence fellings which would exhaust the forest and clear it for growing crops. We are unable to agree. We do not understand how the business was terminated by the decision to clear the remaining stock-in-trade and for this purpose to sell every year more trees than had been sold each year before 1928. If a shop-keeper sells his whole stock off cheaply (and therefore quickly) in order to have room for a new line of goods or to start a new kind o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that it was a business prior to 1928-the sale of the stock-in-trade spread over a number of years does not make it any the less a business. And if we consider the object in view this was to enable a new business-that of growing crops on the land-to be started. The fact that receipts from the new business would not be subject to income-tax is immaterial. We therefore answer the first question referred by saying that the receipts from the sale of forest trees were liable to income-tax. The second question involves a consideration of the meaning of the expression " land used for agricultural purposes/' Judicial authority has not been consistent in its interpretation, but counsel are agreed that the expression may have been used in different senses in different enactments. We should not therefore be justified in wholly relying for the present purpose on constructions placed upon it where it occurs in other enactments, though such constructions may afford a guide. Could we do so the matter would be easier than it is. For instance " land M is defined in the Agra Tenancy Act of 1926 as " land which is let or held for agricultural purposes, or as grove land or for p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the operation is not agricultural." But it is not necessary for us to determine in this case whether, when trees are so grown, the land is being used for agricultural purposes, because admittedly the trees under consideration were of spontaneous growth. And although the general agent of the estare, B. Harcharan Dass, referred to the "maintenance, preservation, nursering, improving and rearing" of the forest, and to there being a regular plan for the improvement of the quality and general condition of the forests this was regarded as an exaggeration, on the admission before the Tribunal that u the forest was of spontaneous growth and that nothing in the nature of preparing the land for the growth of the trees was done/'Expenditure seems to have been mostly on watch and ward and what may be described as "conservation". The learned President of the Tribunal cited three cases to support the view that the land was not used for agricultural purposes. In the first, Kesho Prasad Singh v. Sheo Pragash Ojha, the principal question in issue was one of Hindu law, but a question was raised in it whether a grove was a holding within the meaning of the Tenancy Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r by the circumstances in which the cultivation is carried on." Mr. Wasim has referred us to what has been said in certain commentaries and dictionaries on the meaning of the word "agriculture." At p. 27 of Jain's commentary (1938 edition) it is said, after giving definitions from various dictionaries, that the term is used both in a general and wider sense as well as in the narrow sense of the art or science of cultivating the ground. The wider sense, according to the New Standard Dictionary, would extend to farming, "including, any industry practised by a cultivator of the soil in connexion with such cultivation as forestry, fruit raising, breeding and rearing of stock, dairying, market gardening," but Mr. Wasim concedes that some industries which might be included in the term by such "extension" could not be deemed to be "agricultural" within the meaning of Section 2(1)(a), and that a line must be drawn somewhere. We cannot hold that the mere fact that an industry has some connexion with or is in some way dependent on land is sufficient to bring it within the scope of the term. We do not propose to refer to all the cases which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... times used in the narrow sense of the art or science of cultivating the ground, is also used in a much wider sense so as to include even 'forestry' according to Webster. In which sense it was used by the framers of the Income-tax Act would be a matter for determination and to this end it would not be out of place to consider the probable reason for exemption of agricultural income from Income-tax. No other reason is suggested than the equity of exempting form further burden income which had already paid toll to the State in the shape of land revenue." Referring to the above observations, Rankin, J., in the Calcutta case cited remarked that the construction of "agricultural income" in the Madras case was "somewhat wider" than he could see his way to give. Later in the same judgment he said: "I observe that in the Madras case already cited the Court upon reference to certain dictionaries came to the opinion that the word 'agriculture,' while sometimes used in the narrow sense of the art, or science of cultivating the ground, is also used in a much wider sense so as to include even 'forestry' according to Webster. I am not convi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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