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TMI Blog2019 (5) TMI 843X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of providing shade to the tea bushes in the tea estates of the assessee. That such shade is essential for the proper cultivation of tea cannot be disputed; and hence, we consider it to be a part of the capital asset of the company and tea bushes themselves are the equipment of tea factories. Some of the gravelia trees became old and useless with the expiry of time and naturally to be cut for sale. In view of the above order of the Tribunal and the judgments of the Supreme Court, we are inclined to dismiss the grounds of appeals of the Revenue. - I.T.A. Nos.440 & 441/Coch/2018 - - - Dated:- 8-5-2019 - S/Shri Chandra Poojari, AM And George George K., JM For the Assessee : Smt. K. Parvathy Ammal, CA For the Revenue : Smt. A.S. Bindhu, Sr. DR ORDER PER CHANDRA POOJARI, AM: These appeals filed by the Revenue are directed against the different orders passed by the CIT(A), Kottayam dated 09/07/2018 and pertain to the assessment years 2012-13 and 2013-14. 2. The Revenue has raised the following grounds of appeal: 1. The order of the learned Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rajan Tea Co. (P) Ltd. reported in (1994) 205 ITR 45 wherein it held that the receipts from the sale of spontaneous growth trees done periodically can be assessed under the capital gains' since there is no cost of acquisition and should be treated as 'revenue receipts'. 3. The facts of the case are that during the AY 2012-13, the assessee received income from sale of spontaneous tree growth amounting to ₹ 1,89,07,031.and ₹ 2,31,47,828/- for the assessment year 2013-14. During the assessment proceedings, the Assessing Officer examined the issue of taxability of income from sale of spontaneous trees in detail and assessed the same as business income after allowing proportionate expenditure. 4. On appeal, the CIT(A) decided the issue in favour of the assessee by following the order this Tribunal in the case of Santhosh George vs. DCIT in ITA Nos.291 to 297/Coch/2012 dated 31/07/2013 wherein the Tribunal had considered the issue of taxability of receipts from sale of spontaneous growth of trees and held as under: 9. Shri Mathew Joseph, the ld. representative for the assessee submitted that the assessee has sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We have also carefully gone through the judgment of the Calcutta High Court in the case of Suman Tea Plywood Industries (P) Ltd (supra). In the case before the Calcutta High Court, the assessee claimed sale of trees grown spontaneously as not taxable. The Calcutta High Court, after referring to the judgment of the Full Bench of the Kerala High Court in CIT vs Jacob (E.C.) (1973) 89 ITR 88 (Ker)(FB) and the judgments of the Apex Court in the case of CIT vs B.C. Srinivasa Setty (1981) 128 ITR 294 (SC); Vishnudatta Antharjanam vs Commr. of Agril.l.T. (1970) 78 ITR 58 (SC) and in CIT vs Ambat Echukutty Menon (1979) 120 ITR 70 (SC) found that the receipt on sale of trees grown spontaneously has to be treated as capital in nature and since there is no cost of acquisition, it cannot be assessed as taxable income. This judgment of the Calcutta High Court is directly on the point regarding the taxability of the trees grown spontaneously without any human aid. Since the Apex Court in the case of Maharajadhiraj Sir Kameshwar Singh (supra) is silent with regard to cost of acquisition and it only deals with the issue whether it is agricultural income or not, this Tribunal is of the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff/regeneration charges collected on the sale of timber, the ld. DR submitted that item (i) in the Notes to Financial Statements clarifies that these receipts are unaccounted as capital receipts. Vide letter 16/03/2015, it was clarified that the same was tax collected at the rate of 5% of the sale value of any forest produce disposed of by the Government as per sec. 75A of the Kerala Forest Act, 1961 and 60% of the amount collected shall be utilized for planting and maintenance of softwood trees and those species of trees which form raw material for industries and 40% for forest research. Since the assessee accounts the forest development tariff as capital receipt, the FDT should also be factored in. The Ld. DR submitted that the major activities of the assessee included raising of forest trees and sale of timber, cultivation of plantation crops, eco tourism etc. from which the assessee earned substantial income. Therefore, the ld. DR submitted that the income from the sale of spontaneous growth of trees is to be taxed under any head other than income from business . 6. The Ld. AR submitted that the assessee (KFDC) had been handed over properties from Govt. of K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the area is in a cultivable state and next set of agricultural activities as directed by the Govt. can be commenced. 6.2 It was submitted that the spontaneous growth in question was sold from the following land: a. Kudappanakulam, Subunit IV- Pathanapuram, Block III, Bit-2 , Punalur. b. Kudappanakulam, Subunit IV- Pathanapuram, Block III, Bit-3, Punalur. c. Kudappanakulam, Subunit IV- Pathanapuram ,Block IV, Bit-1 , Punalur. The Ld. AR submitted the copy of the ledger account showing the details of the sale of spontaneous growth of ₹ 1.89 Crores for the AY 2012-13 and of 2.31 Crores for AY 2013-14. The Ld. AR submitted copy of agreement dated 03.11.2011 between the assessee and Sri.R. Rajesh for collection and removal of Matty, Elavu Miscellaneous tree growth in Block III, Bit 2,. Kudappanakulam in Subunit IV Pathnapuram for a sum of ₹ 1,00,16,000/-. 6.3 The Ld. AR submitted agreement dated 27.12.2011 between the assessee and Shri A.V, Thomas for collection and removal of Matty, Elavu Miscellaneous tree growth in Block III, Bit 3, Kudappanakulam in Subunit IV, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in th ecase of CIT Vs. Ambat Echukutty Menon (120 ITR 70) (SC) wherein the Supreme Court upheld the view of the Kerala High Court that the sale of trees of spontaneous growth is of a capital nature. The High Court took note of the facts that the felling of trees was done in such a way that there would be no generation of future growth of the trees concerned. The trees were uprooted along with the roots and stems and there is no possibility of regeneration. In that case, there were around 772 trees of various kinds of spontaneous growth, which were interspersed among the paddy fields. The trees were sold by uprooting the roots. The Supreme Court held that there could not be any object of regeneration of income from the trees growing again as there was no question of a second growth at all. The Supreme Court observed that where the evidence shows that the land has benm acquired for the purpose of cultivation ............. .........and the assesse did not intend to permit regeneration of the trees and he had in fact later put the land to cultivation, the payment received on the sale of trunks cannot be regarded as taxable income. The Supreme Court held that reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or of any products as of any return therefrom, it can be stated that source ceased to be one which could produce any income. The Supreme Court observed that the High Court had considered the fact that profit motive is not decisive of the question whether a particular receipt is capital or income. Any accretion to capital does not become taxable merely because an asset is acquired in the hope that it can be sold at a profit. If the trees are cut with roots, once and for all part of the asset is disposed of. Sale proceeds on account of the disposal cannot constitute revenue because by removing the root, the source from which fresh growth of trees is also removed, sale of such trees is capital and not revenue. Further, the Ld. AR relied on the judgment of the Bombay High Court in the case of CIT vs. N.T. Patwardhan (41 ITR 313) wherein it was held that sale of trees with the roots and land on which it stood was a disposal of the capital assets and it is impossible to split up the transaction into two parts and regard a part of it a capital sale and the rest as a sale producing income. In the said case, it was submitted that there were large number of trees which had grown spontaneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.9 It was submitted that there was no profit making activity and hence, no Income is not assessble under the head Income from Business . This question is also covered by the Supreme Court Judgment in CIT vs. Ambat Echukutty Menon 120 ITR 70 (SC). The Supreme Court has expressly stated - .... It is a case where, although the stump 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 . It was also submitted that the assessing officer had included the income from sale of spontaneous growth of trees under 'profit and gains of business. Section 28 states that the following income shall be charged to income tax under the head 'profit or gain of business and profession'. i) Profit of any business or profession which was carried on by the assessee at any time ; the previous year ii) to viii. Apparently all the other clauses would not cover income from sale of spontaneous tree Therefore, if at all the amount is to be assessed, it would fall only within the ambit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in accordance with those provisions. There are other provisions which indicate that s. 48 is concerned with an asset capable of acquisition at its cost. Section 50 is one such provision. So also is sub-s. (2) of s. 55. None of the provisions pertaining to the head Capital Gains suggests that they include an asset in the acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain. In the case of goodwill generated in a new business there is the further circumstance that it is not possible to determine the date when it comes into existence. The date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains. It is possible to say that the cost of acquisition mentioned in s. 48 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to the facts of this case also. Therefore, the amount cannot be assessed under the head capital gains. It was submitted that whether the fact that amount was received in more than one year will alter the nature of receipt. The assessing Officer had observed that the assessee had received the amount in more than one year and therefore, the amount is assessable as income. It was submitted that the nature of receipts is per se capital, therefore, even if the assessee received the amount in various years that alone would not be a criteria to tax it in the hands of the assessee as income. 6.9.3 The Ld. AR relied on the judgment of the Karnataka High Court in the case of Consolidated Coffee Estates vs. Commissioner of Agricultural Income Tax, Bangalore (76 ITR 29). In the said case gravelia trees were maintained as shade trees for the coffee bushes and it were of spontaneous growth. It was held therein that the shade trees were capital assets and the proceeds are capital receipts. The High Court also observed that the fact that the appellant received the proceeds not in lump sum in one year but in the course of more than one year is immaterial for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o grow spontaneous trees or to earn any income in a systematic from the sale of such trees. 6.9.6 The Ld. AR distinguished the case laws relied on by the Department in support of its contention that income earned from sale of trees of spontaneous growth without human aid or efforts should be brought under taxable income. (a) High Court of Kerala in the case of Travancore Rubbers Tea Company Limitecl (221 1TR 585 Ker) in which case Earnest Money of ₹ 75,000/- was received by the assesse in respect of sale of old and uneconomic rubber trees, consequent to termination of the agreement for breach thereof by the parties. it was held by the High Court that the E.M.D. forfeited was taxable. It was held therein that the amount is as a result of forfeiture of E.M.D. which is the source of the matter. Nexus means immediate cause and not cause of causes. The fact that EMD related to sale of uneconomic nature trees is not to be looked into. Also if the contract had been through whether the same is exempt not considered. (b) In CIT vs. G.R. Karthikeyan (201 ITR 866) the question therein was whether the sum received from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trees in the previous year relevant to the assessment year were trees standing at the time of acquisition or trees which grow on roots and trunks existing at the time of acquisition and cut subsequently. In this case, the Inspecting Assistant Commissioner had no such data before him to conclude that there was no cost of acquisition. It is also for consideration whether the spontaneous growth required any care or attention by way of protection from animal and the like and, if so, whether the assessee did not incur any cost in this regard. It was observed that any decision either way without considering these aspects would be erroneous and any decision in favour of the assessee without considering these aspects would be prejudicial to the interest of the revenue. 6.9.7 Therefore, it was submitted that the decisions relied on by the revenue are not applicable to the facts of the assessee s case. The assessing officer had stated that if the income earned from sale of spontaneous growth is to be exempt from tax, either of the two conditions need to be satisfied. 1) The same should be specifically exempt under IT or 2) It is to be es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nish details, but this 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 is not allowing the licensee to cut the stumps and uproot the roots was regeneration of the income. . 7.1 In our opinion, this issue was settled by the above judgment wherein it was held that receipts from sale of spontaneous growth of trees is a capital receipt not liable to tax. The order of the Tribunal cited supra relied on by the CIT(A), was in conformity with the above judgment of the Supreme Court. Even section 55(2)(a) has no relevance in the case of spontaneous growth of trees. This issue was considered by the ITAT, Ahmedabad Bench in the case of Natraj, Ahmedabad vs. DCIT dated 06/09/2010 in ITA No.3063/Ahd/2010 wherein it was held as under: we find that the provision of section 55(2)(a) shall apply in relation to the capital assets mentioned in section 55(2)(a) of the Act only. The capital assets as mentioned in section 55(2)(a) are exhaustive and all inclusive of capital assets such as goodwill, trade mark, brand name, right to manufacture, prod ..... X X X X Extracts X X X X X X X X Extracts X X X X
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