COMMISSIONER OF INCOME-TAX, KERALA Versus AMBAT ECHUKUTTY MENON

1. UNTWALIA, J. ‑‑These six appeals by special leave preferred by the C. I. T. from the judgments of the Kerala High Court are all interconnec ted and arise out of different proceedings in relation to one assessment year only, They have, therefore, been board together and arc being disposed of by this judgment.

2. The assessee respondent is H. U. F. owning largo agricultural lands in the State of Kerala, In 1905 the family purchased in Court auction some lands covering an area of about 200 acres. There were two irrigational channels in the land drawing water from a river. According to the Sanad there were, about 772 trees of various kinds like Karimpana, cocount trees, jack trees, tamarind trees, maruttu, etc. There were other trees of spon taneous growth but they were not in one block. They were interspersed among the paddy fields as the land, aforesaid was meant for paddy cultiva tion. By an agreement dated 28th November, 1960, the assessee sold to one Volapapa 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 pay ments 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 28th February, 1963, the I. T. O., 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 assessment year would be 1961‑62. The assessee was asked to explain why ho voluntary return had been filed. In reply to the letter of the I. T. O. the assessee wrote a letter dated the 3rd April, 1963, stating therein that there was no lease but an out and out sale of the entire standing timber trees except certain specified varieties and that the sale was effected with a view to extend wet or dry cultiva tion in its fields in the area; the receipts therefrom were of a capital nature or in any event it was an agricultural income. The assessee, however, concluded its letter by stating that he had no deliberate intention of avoiding to file any return. If the I. T. O. so desired, he was ready to comply with his direction.

3. Thereafter, the I. T. O. served a notice on the assessee tinder section 148 of the 1. T. Act, 1961, hereinafter called "the Act". In response to the same the assessee filed a return on March 25, 1966, showing a total not income of Rs. 626.63 pasia for the previous yea! ending on 31st March, 1961, The I. T. O. held that out of the total number of trees numbering 772, four varieties were not sold and roughly speaking the number of trees sold and allowed to be cut as per the agreement came to 367. The trees were of spontaneous growth and the whole of the amount of Rs. 1,75,000, al though the whole of it was not paid during the accounting year, represented the assessee's income which had accrued as per the terms of the agree ment in that very year. He accordingly, assessed the whole of the amount to income‑tax.

4. The A. A. C. allowed the appeal of the assessee in part and held that only a sum of Rs. 75,000 the amount actually received during the accoun ting year, was assessable to Income‑tax in the assessment year 1961‑62. The assessee as well as the Department both preferred appeals before the Income‑tax Appellate Tribunal from the order of the A. A. C. The Tribunal by its order dated the 16th November, 1968, dismissed both the appeals.

5. At the instance of the assessee, the Tribunal stated a case which was numbered as Reference No. 30 of 1970 and referred the following question of law to the High Court for its opinion:

6. "Whether, on the facts and in the circumstances of the case, the receipts from the sale of trees of spontaneous growth were assessable to tax and if so, whether assessable under other sources'?"

7. The High Court by its judgment, since reported in Ambat Echukutty Menon v. C. L T. (1973) 87 I T R 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.

8. At the instance of the revenue also the Tribunal made a reference being Reference No. 29 of 1970 and the question of law referred to the High Court is in the following terms:

9. "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?"

10. Since the High Court in the main reference opined that the receipts 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.

11. The I.‑T. O. initiated penalty proceedings against the assessee, one under section 271(1)(a) of the Act and the other under section 273(6), 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, under section 271(1)(a) of the Act, two references were made to the High Court, one at the instance of the revenue and the other at the assessee's instance and two references were similarly made in relation to the penalty proceedings under section 273(6). its a consequence of the main judgment of the High Court in Reference No. 30 of 1970 all these four references also had to be disposed of in favour of the assessee. Civil Appeal No. 2243 to Civil Appeal No. 2246 have been preferred by the department in these penalty proceedings.

12. Since, in our view, for the reasons to be stated hereinafter, the judg ment of the High Court in the main reference giving rise to Civil Appeal No. 2247 is correct and the said appeal has to fail on that account, it is plain that the other five appeals fail as a corollary to the same and have got to be dismissed as such. I now proceed to discuss and decide the relevant question of law in the main appeal.

13. Before I notice and advert to some special facts of this case it would be better to have a resume of some decisions of the High Court and this Court taking one view or the other in relation to the sale of trees, some cases holding that it is a capital receipt and some cases concluding in different situations and on different facts that it is a revenue receipt. In C. I. T. v. T. Manavedan Tirumalpad I L R 54 Mad. 21 = A I R 1930 Mad. 764, a Full Bench of the Madras High Court held that the receipts from the sale of timber trees by the owner of un-assessed forest lands in Malabar were chargeable to income‑tax. Such trees were treated as usufruct from the land like paddy from land and minerals from mines. Similarly, the Oudh Chief Court expressed the view in Maharaja of Kapurthala v. C. I. T. (1945) 13 I T R 74, that the net receipts from the sale of forest trees are income liable to income‑tax even though the forest would be gradually exhausted by fellings. This was a case of forest trees of spontaneous growth growing on land which was assessed to land revenue. The Patna case viz., Raja Bahadur Kamakshya Narain Singh v. C. I. T. (1951) 20 I T R 385 (Mad)., was also a case of the receipts from the sale of forest trees. In Fringford Estate Ltd. v. C. I. T. (1951) 20 I T R 385 (Mad)., the sale of timber comprised in the trees from the forest was on a business line and the profits derived from the same were held to be assessable to income‑tax on the principle that profits derived from capital which is consumed or exhausted in the process of realization are nonetheless taxable income.

14. 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 C. I. T. v. N. T. Patwardhan (1961) 41 I T R 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 I T R 129, was concerned with the sale of firewood of gravelia trees grown and maintained in tea gardens for the purpose of affording shade 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 C.LT. v. H.B. Van Ingen (1964) 53 I T R 681, and Madras High Court in the case of C. I. T. v. M. S. P. Nadar Sons (1973) 87 I T R 202. Similarly, sale of dead and wind-fallen trees and trees planted for shades were held to be bringing receipts of capital nature: vide. Elixir Plantations Ltd. v. C. I: T. (1969) 71 I T R 741 (Ker.) and Consolidated Coffee Estates (1943) Ltd. v. Commissioner of Agri. I. T. (1970) 76 I T R 802.

15. In C. I. T. v. Venugopala Verma Raja (1), the Kerala High Court was concerned with the trees of spontaneous growth. Obviously, the income was not agricultural income. The owner of the forest had derived income from a lease of the forest which came within the ambit of the Madras Preservation of Private Forests Act, 1949. The lease was for "clear felling" which had a definite and specific meaning under rule 7 framed under the said Act. It did not permit a removal of the trees alongwith their roots. The felling of the trees had to be done in such a way as to permit the regeneration and future growth of the trees concerned. "In other words, what is contemplated by the clear felling method is not the sterilisation of an asset but the removal of a growth above a particular height, leaving intact the roots and the stamps in such a manner as to ensure regeneration, future growth, further felling and a subsequent income." (p. 803). On that account, it was held that it was a revenue receipt and not g capitol one. The case came up to this Court and the view of the Hl b Court was eventually upheld. The decision of this Court is reported in ~. Nenugopala Varma Raja v. C. L T. (1968) 67 I T R 802. A supplementary statement of the case was called for icy this Court but ultimately the decision turned round the true import of the expression "clear felling". Some of the earlier decisions of the various High Courts noticed by me above were referred to and it was thought that there was some conflict between them, yet finally without resolving the conflict, the view expressed at page 466 by this Court with reference to the facts of the case was in these terms:

16. "It is not necessary for the purpose of this case to enter upon a detailed analysis of the principle underlying the decisions and to resolve the conflict. On the finding in the present case it is clear that the trees were not removed with roots. The stumps of the trees were allowed t retrain In the land so that the trees may regenerate. If a person sells merely leaves or fruit of the trees or even branches of the trees it would be difficult (subject to the special exemption under section 4(3Xvidd) 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 realm 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."

17. The question, however, of sale of trees with roots arose before this Court shortly after in A. K. T. K. M. Vishnudatta Antharjanam v. Commls sioner of Agrl. I. T. (1970) 76 I T R 460 (S C). Shah, J., as he then was, who had delivered the judgment in Venagopala's case (1970) 78 I T R 58 (S C), was a party in this case also, the judgment of which was delivered by Gover, J. The test laid down by the Privy Council in C. L T. x. Shaw Wallace and Company (1932) 61 I T C 178 = 2 Comp. Cas. 276 = A I R 1932 P C 138, was applied and it was said at page, 61

18. According to the test, income connotes a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return excluding anything in the nature of a mere windfall. Once the teak trees were removed together with their roots and there was no prospect of regeneration or of any production of a return therefrom, it could well be said that the source ceased to be one which could produce any income."

19. I am aware that the test laid down by Sir George Lowndes in Shaw Wallace's case has been witthtled down to a very large extent by sub sequent pronouncements of the Privy Council, e.g., in copal Saran Narain Singh v. C. I. T. (1935) 3 I T R 237 (P C) and Kamakshya Naraiir Singh v. C. I. T. (1943) 11 I T R 513 (P C), yet in the matter of sale of trees when this Court applied the same test in Vishnuata's case, it was for the purpose of laying strees on the object of the felling of the trees. The return may be one and only one. But if the object of felling the trees leaving the roots and stumps intact is for regeneration of income, then whether income is regenerated or not is immaterial. But in a case where the trees are gold by uprooting the roots nobody can say that there could be any object of regeneration of income from the trees growing again as there was no question of a second growth at all. Similarly, ordinarily and generally, when the treat are sold and allowed to be felled by leaving the roots and stumps intact, then in case of trees of spontaneous growth there is a likelihood of fresh sprouting and further growth of trees on the left out roots and stumps. The presumption in such cases generally would be that the owner did it with the object of regenerating the income. But there may be cases although few and far between, like the one with which we are concerned here where the roots and stumps were not allowed to be uprooted and cut by the licensee or the lessee, yet the object was not the regeneration of the trees but a protection of the land eventually to be used for the purpose of cultivation. In this background of the law, I now proceed to refer to the special facts of this case.

20. Clauses (12) and (13) of the agreement dated November, 28 1961, entered into between the assessee and Velappa Rowther are as follows:

21. "(12) The trees in the reared forest have to be cut neatly and the relative stumps should not be either pulled out or cut out.

(13) No. 3 should not enter on the lands from where trees are or at on the sprouts coming up from there. After the cutting sprouts are not to be cut."

22. 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 some thing 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 the roots. The trees sold were spread in an area of 60 acres of land only. Even in that area the trees were not in any thick or continuous forest. They were interspersed by paddy fields. In its very first communication to the I.‑T. O. sent on 3rd April 1963, the assessed perhaps was made aware of the decision of the Kerala High Court in C. I. T. v. Venugopala Raja, which was a case of private forest governed by the Madras Act. The assessee, therefore, claimed that there were rte private forests in Cochin area of Kerala where the land was situated. The assessed asserted that in substance and in effect the sale was of the entire standing timber, i.e. totality of the trees an "the sale was effected with a view to extend wet or dry cultivation to that area as wall since the standing trees were a hindrance for such extensions". In this very letter, the assessee also asserted:‑"This is the very first time that our thavazhi has sold the trees. The trees, the subject‑matter of the sale contract, were there at the time of the purchase of the agricultural lands by our thavazhi in 1080 M. E. The trees were old trees. No tree had been sold after our thavazhi became the owner of the agricultural lands. A large extent of agricultural lands was purchased and these trees formed part and parcel of such holding. None of us know when the trees began to grow. After purchase of the lands we had developed the same and in the process we sold the trees with the object mentioned above. The present sale has been the only sale and it will be the last one laso since our idea is to extend cultivation to this area as well."

23. The Tribunal in its appellate order noticed the argument of the assessed that its sole occupation way agriculture and the attraction in the purchase of the land in the year 1905 was two irrigational channels contained therein. It also noticed the other facts stated in the latter aforesaid of the assessee and finally concluded on the basis of clauses (12) and (13) of the agreement:

24. "It is clear from these that the assessee was reserving to itself the results of the future growth and a source of income."

25. The case was squarely covered, in its opinion, by the decision of the Kerala High Court in Venugopala's case. It further observed that the assessee was claiming exemption and it was up to him to furnish all the information as to what trees would not regenerate, what kind of trees were sold, etc. The assessee had failed to furnish these details. Yet i would be noticed that without rejecting the assessee's stand that the transac tion in question was the first and the last sale of trees by the assessee an 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 departmental authorities that the receipt was a revenue receipt assessable to income‑tax. It should be noted that the assessment made w 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 question of the assessee's claiming any exemption and failing to get it for it alleged failure to furnish any more details. But it was a case where, in order to get the receipt as a revenue receipt, it was for the Department to reject the assessee's stand and to bold that the object of the assessee in no allowing the licenses to cut the stumps and uproot the roots was regeneration of the income. The High Court has also noticed the fact a found mentioned in the order of the Tribunal that by the time the assess ment was completed by the I.‑T. O. an area of 10 acres had been convert into cultivable land. In our opinion, therefore, the High Court rightly- distinguished the decision in Venugopala's case and applied the ratio of that of Nishnudatta's case. As I have observed above, the facts of this case were on a line which on the surface was blurred and indistinct, yet, on a careful examination of the matter, I find that the dividing line, though thin, none the less, is distinct enough to make this case fit for application of the ratio of the decision of this Court in Vishnudatta's case. I, accordingly uphold the view of the High Court.

26. In the result all the six appeals are dismissed but on the special facts and circumstances of this case we make no order as to costs in any of them.

27. PATHAK, J.‑ I agree with my learned brother that the appeals should be dismissed. And I shall set out my reasons.

28. The case is one where trees of spontaneous growth were sold on con dition that the purchaser would cut and remove the trunks without dis turbing the stumps and roots embedded in the soil. Where trees are so felled and removed, and the stumps and roots are allowed to remain in the land with a view to regeneration of the trees, the intention of the owner would be to indulge in a profit‑making activity, and the case falls within V. Venugopala Verma Rajah v. C. I. ‑T. (1970) 76 I T R 460 (S C) The receipts from sale of the trunks would be revenue receipts. But in the present case there was no intention to reserve the stumps and roots for the purpose of allowing regeneration of the trees. 'The intention and subsequent conduct of the assessee establishes that stipulation against removal of the stumps and roots was intended to protect the surface of the land from indiscriminate injury because the land was to be applied to cultivation. Intention is a material factor in such cases, and each case has to be decided on its particular facts. Without evidence of the intention or object behind such a stipulation, the mere fact the trees were sold without stumps and roots cannot lead to the necessary inference that a profit making activity was involved. Where the evidence shows that the land has 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 no intend to permit regeneration of the trees, and that he had in fact later put the land to cultivation, the payment received on sale of the trunks cannot be regarded as taxable income. And yet the case is distinguishable from the facts to A. K T. K. M. Vishnudatta Antharjanam v. Commissioner of Agrl. I.‑T. (1970) 78 I T R 58 (S C) 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 or A. K. T. K. M. Vishnudatta Antharjanam It is a case where, although the stump and 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.

29. The appeals are dismissed, but there is not order as to costs.

30. Appeals dismissed.