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TMI Blog1979 (9) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... iver. According to the Sanad, there were about 772 trees of various kinds like karimpana, coconut trees, jack trees, tamarind trees, maruttu, etc. There were other trees of spontaneous growth but they were not in one block. They were interspersed among the paddy fields as the land aforesaid was meant for paddy cultivation. By an agreement dated November 28, 1960, the assessee sold to one Velappa 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 of 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 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 I.T. Act did not file any voluntary return. On February 28, 1963, the ITO, Palghat, wrote to the karanavan of the assessee-family pointing out that he had information that the assessee had leased certain private forests to Velappa Rowther for cutting timber; and that the assessee had received Rs. 75,000 during the relevant year. The corresponding as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Menon v. CIT [1973] 87 ITR 129 (Ker), has answered the question in the negative, in favour of the assessee and against the department. Civil Appeal No. 2247 arises out of Reference No. 30 of 1970. At the instance of the revenue also the Tribunal made a reference being Reference No. 29/1970 and the question of law referred to the High Court is in the following terms : " Whether, on the facts and in the circumstances of the case, the whole of the sum of Rs. 1,75,000 was not assessable to tax in the previous year ending on March, 31, 1961, relevant for the assessment year 1961-62 ? " Since the High Court in the main reference opined that the receipt from the sale of the trees were of a capital nature this reference was also answered in favour of the assessee. Civil Appeal No. 2242 arises out of Reference No. 29 of 1970. The ITO initiated penalty proceedings against the assessee, one under s. 271(1)(a) of the Act and the other under s. 273(b), the former being for the alleged failure of the assessee to furnish the return for the period in question and the latter for its alleged failure to furnish an estimate of the advance tax payable. In relation to the penalty proceeding, u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom capital which is consumed or exhausted in the process of realization are none the less taxable income. The other cases taking the view that money received by sale of trees is a capital receipt are of the nature where trees have not been treated as usufruct of the land. They were treated as part of the capital assets and the receipts from the sale of such trees retained the same character. In CIT v. N. T. Patwardhan [1961] 41 ITR 313, the Bombay High Court was dealing with a case of the sale once for all of the trees with roots even though they were of spontaneous growth. The receipts from such sales were held to be capital in nature. The Kerala High Court in State of Kerala v. Karimtharuvi Tea Estate Ltd. [1964] 51 ITR 129 was concerned with the sale of firewood of gravelia trees grown and maintained in tea gardens for the purpose of affording shade to tea plants. Even sale proceeds of forest trees felled for the purpose of coffee plantation in the land were held to be capital receipts by the Mysore High Court in the case of CIT v. H. B. Van Ingen [1964] 53 ITR 681 and the Madras High Court in the case of CIT v. M. S. P. Nadar Sons [1973] 87 ITR 202. Similarly, sale of dead a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial exemption under section 4(3)(viii) of the Indian Income-tax Act, 1922) to hold that the realization is not of the nature of income. Where the trunks are cut so that the stumps remain intact and capable of regeneration, receipts from sale of the trunks would be in the nature of income. It is true that the tree is a part of the land. But by selling a part of the trunk, the assessee does not necessarily realise a part of his capital. We need not consider whether in case there is a sale of the trees with the roots so that there is no possibility of regeneration, it may be said that the realisation is in the nature of capital. That question does not arise in the present case. " The question, however, of sale of trees with roots arose before this court shortly after in A. K. T. K. M. Vishnudatta Antharjanam v. Commr. of Agrl. I.T. [1970] 78 ITR 58 (SC). Shah J., as he then was, who had delivered the judgment in Venugopala's case [1970] 76 ITR 460 (SC) was a party in this case also, the judgment of which was delivered by Grover J. The test laid down by the Privy Council in CIT v. Shaw Wallace and Company [1932] 6 ITC 178; 2 Comp Cas 276; AIR 1932 PC 138, was applied and it was sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the agreement dated November 28, 1968, entered into between the assessee and Velappa Rowther are as follows : " (12) The trees in the reared forest have to be cut neatly and the relative stamps should not be either pulled out or cut out. (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 with 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sale 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 assessment on consideration of such materials as were produced by it. It was not asked to produce any 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 the assessee's claiming any exemption and failing to get it for its alleged failure to furnish any more details. But it was a case where, in order to net the receipt as a revenue receipt, it was for the department to reject the assessee's stand and to hold that the object of the assessee in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit-making activity was involved. Where the evidence shows that the land had been acquired for the purpose of cultivation, 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 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. And yet the case is distinguishable from the facts in A. K. T. K. M. Vishnudatta Antharjanam v. Commr. of Agrl. I.T. [1970] 78 ITR 58 (SC). That was a case where the trees were sold with their roots, and it was held by this court that by 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 affected 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 Verma Rajah [1970] 76 ITR 460 (SC) or A. K. T. K. M. Vishnudatta Antharjanam [1970] 78 ITR 58 (SC). It is a case where, although the stump and roots remained after the trees were felled an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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