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PETITIONER: V. VENUGOPALA VARMA RAJAH

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, KERALA

DATE OF JUDGMENT: 24/09/1969

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. GROVER, A.N.

CITATION:  1970 AIR 2051            1970 SCR  (2) 547  1970 SCC  (2) 165  CITATOR INFO :  RF         1970 SC2055  (3)  E          1980 SC  71  (11,12,17)

ACT:     Capital or Income--Contract for ’clear felling’ of trees i.e.  cutting them so as to leave six inches of the stump to allow    regeneration--Forest              of    spontaneous growth--Income  from sale of trees so felled whether in  the nature of revenue.

HEADNOTE: In  computing the income of the appellant’s father  for  the assessment year 1959-60 the Income-tax Officer included  Rs. 75,000 received under an agreement for cutting and  removing trees  from 500 acres of forest land in Madras  State.   The Income-tax Officer held that the income was taxable  because the  land was leased for clear felling by the father of  the appellant.   What the expression ’clear felling’  meant  was not  investigated by the Income-tax Officer.  The  Appellate Assistant Commissioner confirmed the assessment order.   But the  Tribunal held that the receipt was of a capital  nature and  deleted it from the taxable income.  In  reference  the High  Court differed from the Tribunal.  In appeal  ’against the  High Courts order this Court directed the  Tribunal  to submit  to  this  Court a supplementary  statement  of  case setting out the terms of the agreement between the father of the appellant relating to the rights conveyed to the lessees and  especially  about the import of the’ term  relating  to ’clear felling. The Tribunal in its supplementary  statement of  case  set out the relevant terms of  the  agreement  and observed  that the import of the expression ’clear  felling’ is  that ’all trees except casurina are to be  felled  at  a height  not exceeding six inches from the ground, the  barks being left intact on the stump and adhering to it all  round the stump without being torn off or otherwise changed."   It was not suggested that there were any casurina trees in  the forest land let out to the lessees and it was common  ground that the trees in the forest were of spontaneous growth. HELD: The appeal must be dismissed.      the  finding in the present case it was clear that  the

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trees were not removed with roots.  The stumps of the  trees were  allowed  to remain 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 be1  difficult (subject to the special exemption under  s.  4(3)(viii)   of the  Income-tax Act, 19’22) to hold that the realisation  is not of 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. [553 B-C]     Commissioner   of  Income-tax,  Madrs,  v.T.   Manavedan Tirumalpad, I.LR.. 54 Mad. 21, In re: Ram Prasad, I.L.R.  52 All. 419, Maharaja of Kapurthala v. Commissioner of  Income- tax,  C.P. & U.P. 13 I.T.R. 74, Raja Bahadur Kamkshya Narain Singh   v.  Commissioner of Income-tax, Bihar & Orissa,   14 I.T.R. 673,  Fringford Estate Ltd., Calicut v.  Commissioner of Income-tax, Madras, 20 I.T.R. 285, Commissioner of Income tax, Bombay South v.N.T. Patwardhan, 41 I.T.R. 313,State  of Kerala v. Karimtharuvi Tea Estate Ltd.  51 I.T.R.  129   and Commissioner  of  Income-tax, Mysore v.H.B.  Van  Ingen,  53 I.T.R. 681, referred to. 548     [Question  whether  in case of sale of  trees  with  the roots  so that there is no possibility of  regeneration  the realisation  may  be said to be, in the nature  of  capital, left open.] [553 D]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 810 of 1967.     Appeal  by  special leave from the  judgment  and  order dated August 3, 1966 of the Kerala High Court in  Income-tax Referred Case No. 49 of 1965. K. Javaram, for the appellant.     S.T.  Desai,  R.N.  Sachthey and  B.D.  Sharma  for  the respondent. Sardar Bahadur Saharya. ,for the Intervener. The Judgment of the Court was delivered by     Shah,  J.   In computing the income of  the  appellant’s father to tax for the assessment year 1959-60 the Income-tax officer included Rs. 75,000 received under an agreement  for cutting  and  removing  trees from  500  acres  of  Mangayam Katchithode  forest.  The Appellate  Assistant  Commissioner after  calling ,for a report on certain facts confirmed  the order.   But  the Tribunal held that the receipt  was  of  a capital nature and deleted it from the taxable income.     At  the instance of the Commissioner of Income-tax,  the Tribunal  referred the following question to the High  Court of Kerala:                   "Whether   on  the  ,facts  and   in   the               circumstances  of  the  case,  the  Income-tax               Appellate   Tribunal  was correct  in  holding               that Rs. 75,000/- being income from felling of               trees   from   forests  is  not   subject   to               income-tax ?" The High Court answered the question in the negative.     We are of the view that the facts found by the  Tribunal are  not sufficient to enable us to record an answer to  the question  referred.   The Income-tax officer held  that  the income  was  taxable because 500 acres of  forest  land  was leased  for "clear felling" by the father of the   appellant and  this  fetched   an income of Rs.  75,000/-.   What  the expression  "clear  falling" meant was not  investigated  by the   Income-tax    officer.    The    Appellate   Assistant

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Commissioner  in dealing with the contention raised  by  the appellant  that  the   receipt  was  of  the  nature   of  a Capital, observed:     "The  claim  is based on the reasoning  that  the  clear felling  of’  forest  trees amounts to  sterilisation  of  a capital  asset.   In other words clear felling  is  said  to involve total  destruction  of  the 549 forest.   It is admitted that the trees are  of  spontaneous growth and it has not been established that removal of trees has  in  any way affected the value of the property.   As  a matter of fact, _clear felling is resorted to make the  land more productive and more valuable.  At  any rate the   claim has not been  substantiated beyond doubt and hence there  is no scope for any relief."     The Tribunal relying upon the observation of the Income- tax  officer "that the trees were not cut together with  the roots but only 6" above the ground and that they were  later on  destroyed"  held that there was "nothing  to  show  that there was a diminution     of capital assets". On the  other hand, the Income-tax officer had given a clear finding  that this  was  a  case  of "clear  felling".  After  making  ’an extensive  quotation from the Judgment of the High Court  of Bombay in Commissioner of Income-tax v.N. Patwardhan(1), the Tribunal  stated that the observations applied to the  facts in the case before them, and on that account they upheld the claim of the ’appellant.     The  High  Court observed that "it was agreed  that  the Mangayam  Katchithode  forest was within the  ambit  of  the Madras  Preservation of Private Forests Act, 1949,  and  the statutory  rules  on  the subject and  that  the  expression "clear  feeling"  is   an expression  with  a  definite  and specific  meaning  as far as such  forests  are  concerned". They  then proceeded to quote r. 7 framed under  the  Madras Preservation of Private Forests Act, 1949, and after setting out  conditions (b) & (c) observed that "the felling of  the trees  under  the "clear felling" method will not  permit  a removal  of the trees along with their roots.  On the  other hand,  the  clear indications were that the felling  of  the trees  under the clear indications were that the felling  of the  trees under the regeneration and future growth  of  the trees  concerned.  In other words, what is  contemplated  by the  clear felling method is not sterilisation of  an  asset but  the  removal of a growth ,above  a  particular  height, leaving intact the roots and the stumps in such a manner  as to  ensure regeneration, future growth, further felling  and subsequent  income."  On that view the Court held  that  the receipt  of  Rs. 75,000/- was a revenue receipt  and  not  a capital receipt as held by the Appellate Tribunal.     The departmental authorities. the Tribunal and the  High Court  have expressed different views on the import  of  the expression "clear ,felling" and about the true effect of the agreement.   The Income-tax officer taxed the amount of  Rs. 75,000/-  on the footing that the 500 acres of forest  lands were  leased  for  clear felling.  The  Appellate  Assistant Commissioner held that the trees being of spontaneous growth and the falling of the trees not having (1) [1961] 41 I.T.R. 313. 550 affected  the  value  of the property as  a  result  of  the clearance, the lands became more productive and the  receipt was  a  revenue  income.  The Tribunal held  that  the  case being  one of "clear felling" and the trees having been  cut 6" above the ground and "that they were later on  destroyed" it  was  a  case of clear felling ’and the  receipt  was  of

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capital  nature.   The High Court was of the view  that  the "clear felling" of forest lands meant cutting trees and  not removal  of the roots so that there would  be  regeneration, future  growth  of  the roots and the  stumps  and  on  that account the receipt was of revenue nature.     It  appears  that  before  the  Income-tax  Officer  the agreement dated Sept. 11, 1957 was not produced. After   the Appellate  Assistant Commissioner remanded the case  to  the Income-tax Officer the latter submitted the "remand  report" and at that time the agreement was produce. The Tribunal  in support  of  its conclusion referred to the preamble of  the document  and  the conditions  thereof.  The learned  Judges of  the  High  Court observed that they did  not  place  any reliance  on the extracts in the lease given in paragraph  2 of  the  statement of the case for coming to the  conclusion they  had  reached.  Why the High Court thought  it  fit  to discard the recitals, is not clear from the record.     The  facts  found being not clear, it  is  difficult  to record  any conclusion whether the receipt was of a  revenue nature  or of a capital nature.  We therefore call upon  the Tribunal  to submit to this Court a supplementary  statement setting out the terms of the agreement between the father of the  appellant  relating  to the  rights  conveyed  to,  the lessees in the forest lands and especially about the  import of the term relating to "clear  felling".  The Tribunal will submit  the supplementary statement of the case only on  the basis  of the evidence on the record and will not  take  any additional  evidence.   The report to be  submitted   within three  months  from the date on which the papers  reach  the Tribunal.     Shah,  J.   By  our order dated February  13,  1969,  we called for a supplementary statement of the case setting out the  terms  of  the agreement conveying the  rights  in  the forest  trees to the lessees, and the true import   of   the expression  "clear   felling".   The  Income-tax   Appellate Tribunal  has  submitted a supplementary statement  o,f  the case.   The Tribunal has set out the relevant terms  of  the agreement  and  has  also observed that the  import  of  the expression  "clear  felling"  is  that  "all  trees   except casuring  are  to be felled at ’a height not  exceeding  six inches  from the ground, the barks being left intact on  the stump  and adhering to it all round the stump without  being torn off or otherwise changed".     There  is  no suggestion that there  were  any  casurina trees  in  the forest lands let out to the lessees.   It  is common  ground  also that the trees in the forest  were   of spontaneous growth.  The 551 Tribunal has found that by the use of the expression  "clear felling"  it was stipulated that the trees are to be cut  so that  6" of the trunk with the barks intact and adhering  to it  all  round  the stump is left. This is with  a  view  to permit regeneration of the trees.     The  question whether receipts from sale of trees by  an owner of the land who is not carrying on ’business in timber may  be regarded as income liable to tax has given rise  to. some   difference  of  opinion  in  the  High  Courts.    In Commissioner   of   Income-tax,   Madras   v.T.    Manavedan Tirumalpad,(1) a Full  Bench of  the Madras High Court  held that the receipts ,from sale of timber trees by the owner of unassessed  forest  lands in Malabar were  revenue  and  not capital.   The Court observed  that if income from the  sale of coal from a coal-mine or stone won from a quarry or  from the  sale of paddy grown on land be regarded as income,  but for the special exemption granted under the Income-tax  Act,

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there is no logical reason for holding that income from sale of trees is not income liable to tax.     In re Ram Prasad(2) a Division  Bench of the   Allahabad High  Court held that receipt from sale of timber is  income liable  to be taxed and is not a capital receipt.  The  case arose under the Government Trading Taxation Act 3 of 1926.     In Maharaja of Kapurthala v. Commissioner of Income-tax, C.P.  and  U.P.(3)  the  Oudh Chief  Court  held   that  net receipt  from the sale of forest trees is income  liable  to income-tax,   eventhough  the  ,forest  may   be   gradually exhausted  by  fellings.  The Court  further  observed  that income  from the sale of forest trees of spontaneous  growth growing  on  land which is assessed to land revenue  is  not agricultural  income within the meaning of s. 2(1 )  (a)  of the  Income-tax Act and is not exempt from income-tax  under s. 4(3)(viii) of the Act.     In  Raja Bahadur Kamakshya Narain Singh v.  Commissioner of  Income-tax,  Bihar  and Orissa(4)  a  similar  view  was expressed by the Patna High Court.     In  Fringford Estates Ltd., Calicut v.  Commissioner  of Income-tax, Madras(b) it was held that profits realised from the  sale  of timber were trade profits and were  liable  to income-tax.   In that case the assessee Company formed  with the object of purchasing, clearing and improving of  estates and  the  cultivation and sale of tea, coffee etc.  in  such estates, purchased a tract of land part of which had already been  cultivated with tea and the rest was a jungle  capable of being cleared and made fit for plantation.  The (1) I.L.R. 54 Mad.21. (2) I.L.R.52 All. 419. (3) 13 I.T.R. 74. (4).   14 I.T.R.   673. (5) 20 I.T.R. 385. 552 Company entered into an agreement with a timber merchant for clearing  a part of the forest of all trees and for sale  of the  trees m the market.  This was held to be a part of  the business activity of the Company.     The cases on the other side of the line are to be  found in  Commissioner  of  Income-tax,  Bombay  South   v.   N.T. Patwardhan(1) in which a Division Bench of the Bombay   High Court  held that when old trees which stood on the  land  of the assessee were disposed of with their roots "once and for all",  the  receipts were capital.  The Court  observed  (p. 318):                   "The  asset of the man was the  land  with               the  wild growth of trees on it.  If the  land               with the trees had been sold, there could have               been no doubt that the sale was a  realisation               of capital and it would not have been possible               to  argue that  the  transaction in so far  as               it involved a  sale of  the trees  was a  sale               producing income and the remaining part of               the  transaction was a capital sale.   In  the               present  case  the  land is  retained  by  the               assessee  but a part of the asset is  disposed               of  in its entirety by selling the trees  with               roots once and for all."     In  State of Kerala v. Karimtharuvi Tea  Estate  Ltd.(2) the  Kerala  High  Court held in a case  arising  under  the Kerala  Agricultural Income-tax Act, 1950, that  the  amount realised  by  sale as firewood of old and  useless  gravelia trees grown and maintained in tea gardens for the purpose of affording  shade  to tea plants is capital receipt  and  not revenue receipt.  The Court observed:

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                 "The   gravelia  trees  were   grown   and               maintained  for the sole purpose 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  the  trees  should  hence   be               considered to be as much a part of the capital               assets  of  the  company  as  the  tea  bushes               themselves or the equipment in its ,factories.               Some  of  the gravelia trees  became  old  and               useless  with  the  efflux of  time  and  they               naturally  had to be cut down and  sold.   The               sale  proceeds of such trees  cannot  possibly               amount to a revenue receipt."     In  Commissioner   of  Income-tax,  Mysore  V.H.B.   Van Ingen(3)  the Mysore High Court held that the  assessee  who had  purchased  a  coffee estate of which a  part  had  been planted with coffee plants and the rest was jungle, and  had cleared the jungle (1)41 I.T.R. 313. (2) 5 I.T.P 129. (3)  53 I.T.R 681           553 for  the purpose of planting coffee and had sold  the  trees felled,  price  realised  by the sale of  the  trees  was  a capital  and  not a revenue receipt, because the  trees  had grown  spontaneously,  and the assessee  had  purchased  the estate including the trees.     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 to remain  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 s. 4(3)(viii) of the 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 appeal fails and is dismissed with costs. G.C. Appeal dismissed. 554