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TMI Blog1979 (2) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... ting year ends on June 30, 1968, June 30, 1969, and June 30, 1970, respectively. A prospectus was issued at the time of incorporation showing the forests which had been taken on lease and the trees which were to be cut and sold; the position disclosed was that the assessee had taken lease for a sum of Rs. 2.5 lakhs from Amalgamated Malabar Estates Ltd. of Calicut, about 10,000 acres of virgin forest land in Malabar. The lessors had acquired the property only two years prior to the lease. The lease was for a term of 83 years. The property was known as " Poithana Estate ". The shareholders were assured by the prospectus that the operations to be carried on will not exhaust the forest. The forest wealth was stated to be well nigh inexhaustible as there is a constant reafforestation, both natural and artificial. The forests were in the Malabar area of the Kerala State, governed since 1949, by the provisions of the, Madras Preservation of Private Forests Act, 1949. By s. 3 of the Act no owner of any forest can, without the previous sanction of the District Collector, sell, mortgage, lease or otherwise alienate the whole or any portion of the forests. By definition, " owner " includes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempt from rule 7(b) from January 1, 1968. For the assessment years 1969-70 and 1970-71, the assessee claimed that the amount realised by the sale of trees was assessable only as capital gain. During 1969-70, the total receipt on sale of trees from the forests was Rs. 5,67,891. Receipts under other heads totalled Rs. 9,33,552. The assessee showed the former amount as part of the capital gains and deducted therefrom certain costs and value as on January 1, 1954, and showed a capital gain of Rs. 7,609. The business income was shown at Rs. 1,523. The officer did not accept this claim. For the assessment year 1970-71, the facts were practically the same and the ITO's conclusion was also the same. For the year 1971-72, the assessment proceeded on the same footing. It is enough to notice that the assessee's appeal to the AAC was unsuccessful, as far as the aspects raised in this reference are concerned. For the year 1971-72, by the time the AAC took up the appeal, the Tribunal's decision in the earlier two years had been rendered. The AAC, therefore, followed the Tribunal's decision and held against the assessee. On further appeal, the Tribunal held that the income from the sale pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregate. It cannot be said that this amounts merely to a grant of the use of the capital of the licensor but it was really a grant of a right to a portion of the capital in the shape of a general right to the capital asset. In support of this distinction between the use of capital and the taking away of capital, counsel relied upon the following observation of Lawrence J. in Greyhound's case [1936] 20 TC 373, 378: The question as to what receipts are revenue and what are capital has given rise to much difference of opinion; but it is clear, in my opinion, that, if the sum in question is received for what is in truth the user of capital assets and not for their realisation, it is a revenue receipt, not capital.' That may be so but the question has to be decided on the nature of the grant. The terms of the covenant in the present case which have been quoted above show that the transaction was not one merely of the user of capital assets but of their realisation. By this test, therefore, the receipt were on capital account and not revenue. " In CIT v. N. T. Patwardhan [1961] 41 ITR 313, the Bombay High Court had occasion to consider whether the income realised from sale of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the man and the source of income was merely the land and the roots of the trees which had firmly grown and securely embedded in the land providing a ready and easy source for fresh growth of wood when the trees were cut did not form any part thereof." It is to be noted that the lands were grass lands and there was nothing to show that the cutting and removal of the trees was part of any process of regeneration or of any income raising machinery. The above decision of the Bombay High Court was referred to by the Supreme Court in A. K. T. K. M. Vishnudatta Antharjanam v. Commr. of Agrl. IT [1970] 78 ITR 58. That decision was on appeal against the decision of this court reported in [1969] 71 ITR 733. This court's judgment was reversed. The question which arose was whether the income realised by the sale of trees in a teakwood plantation was a capital receipt or revenue receipt. Differing from this court, it was held by the Supreme Court that the receipts were capital receipts. The court observed (p. 60) : " The principal point that has to be determined is whether the sale proceeds of the teak trees constituted capital or revenue. It appears to have been common ground before the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uce any income. The Bombay High Court in CIT v. N. T. Patwardhan [1961] 41 ITR 313 (Bom) said that from the point of view of a person engaging himself in the business of sale of trees the capital structure would be not only the land on which the trees stood but also the roots of the trees from which the wood yielded income. If the trees were sold off with the roots the capital structure would be affected. The High Court in the judgment under appeal was particularly impressed with the profit motive of the assessee in planting teak trees although that was done several years ago. Bat it was overlooked that profit motive is not decisive of the question whether a particular receipt is capital or income. An accretion to capital does not become taxable income merely because an asset is acquired in the hope that it may be sold at profit. It must also be remembered that trees so long as they are uncut form a part of the land. If they are cut with roots once and for all a part of the assets is disposed of. The sale proceeds on account of their disposal cannot constitute revenue because by removing the roots the source from which fresh growth of trees can take place, is also removed. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the business of felling timber. Therefore, the receipts were treated as of a capital nature and not as revenue receipts. It is enough to observe that on a proper construction of the agreement this court had held that although the trees were not removed with the roots they were removed with the object and purpose of annihilation of the trees and for converting the land to agricultural use. A case on almost similar facts was what was decided by a Division Bench of this court in Pullangode Rubber and Produce Co. Ltd. v. CIT [1971] 79 ITR 738. The assessee there was a limited company doing rubber plantation business. It took on lease 2,000 acres of forest land from the Senior Rani of the Padinjare Kovilakam under two leases agreeing to pay annual rent of Rs. 2,500 and an additional sum of Rs. 2 for every acre of land brought under rubber cultivation. . The second of these leases provided in clarification of the provisions in the earlier deed that the assessee had a right to cut and remove and sell trees and other forest produce subject to payment to the Senior Rani of 50% of the net proceeds of the sale (and 25% for the subsequent contracts). The question arises in regard to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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