Receipts from the sale of teak trees which were removed together with their roots constitute capital receipt: CA Naresh Jakhotia

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Receipts from the sale of teak trees which were removed together with their roots constitute capital receipt: CA Naresh Jakhotia

Income tax Act is an interesting piece of legislature. The more you read it, the more interesting it becomes. There are various interesting cases decided by the judiciary. Here is one such judgment which has concluded as under:

  1. Sale proceeds of the cutting of the periodical growth of the bamboos when they reached their optimum growth is a revenue receipt liable for taxation
  2. Sale proceeds of the dead and flowered bamboos is capital in nature and so not liable for taxation.

Its an interesting case. I am reproducing the entire judgment for the benefit of all as the ratio decided in the case could have multiple dimension and application in various other cases. While delivering the judgment, the Madras Hihg Court has followed the supreme court rulling int eh case of A.K.T.K.M. Vishnudatta Antharjanam vs. Commr. of Agrl. IT (1970) 78 ITR 58 (SC). The copy of the said supreme court rulling is also produced hereunder for the benefit of the readers.

  1. COMMISSIONER OF INCOME TAX vs. SILVER CLOUD FOREST & PLANTATIONS

HIGH COURT OF MADRAS

Thanikkachalam & N.V. Balasubramanian, JJ.

Tax Cases Nos. 630 to 632 of 1983

7th March, 1996

(1996) 64 CCH 0322 ChenHC

(1998) 150 CTR 0349 : (1998) 231 ITR 0671

Legislation Referred to

S 4

Case pertains to

Asst. Year 1974-75, 1975-76, 1976-77

Decision in favour of:

Assessee

Income—Capital or revenue receipt—Sale of trees—Bamboo trees grown in coffee and tea estate for shade—Amount received on sale of dead and flowered bamboo trees which were removed once for all is capital receipt.—A.K.T.K.M. Vishnudatta Antharjanam vs. Commr. of Agrl. IT (1970) 78 ITR 58 (SC) : TC 38R.801 followed

(Para 3)

Conclusion :

Amount received on sale of dead and flowered bamboo trees which were removed once for all is capital receipt.

Counsel appeared:

C.V. Rajan, for the Revenue : P.P.S. Janarthana Raja, for the Assessee

K.A. THANIKKACHALAM, J.:

Judgment

In pursuance of the order passed by this Court, dt. 20th April, 1982, the Tribunal referred the following common question for the asst. yrs. 1974-75, 1975-76 and 1976-77 for the opinion of this Court, under s. 256(2) of the IT Act, 1961 :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount received on the sale of bamboo is only a capital receipt and hence the same is not assessable to tax as revenue receipt?”

  1. The assessee is a registered firm running a coffee and tea estate in which there were also shade trees, such as bamboos and silver oaks. Permits were issued for the removal of the bamboos. According to the said permits only dead and flowered bamboos alone can be removed. The assessee was also periodically cutting live bamboos and selling them, the income from which was subjected to tax in the earlier years. The contention of the assessee was that for the asst. yrs. 1974-75 and 1975-76, the bamboos which were removed at the roots could not give rise to an income as the sale proceeds would constitute only capital gains, not liable to tax. The ITO was of the view that the sale of the bamboos cut and sold by the assessee could be of revenue nature and, therefore, liable to income-tax. The CIT(A), on appeal after going through the facts in detail, came to the conclusion that the assessee used to cut the dead and flowered bamboos, along with the bamboos grown to their optimum size. The CIT(A) also verified the permits granted to the assessee for cutting and removing only the dead and flowered bamboos. But in the present assessment year under consideration, the assessee removed only the dead and the flowered bamboos and sold them. The sale proceeds of the dead and flowered bamboos is the subject-matter in the appeals before the CIT(A). He held that the income from such sale was different from the income earned by the periodical cutting of live bamboos ; the former would be a capital receipt, whereas the latter would be a revenue receipt. The CIT(A) also relied upon the decision of the Supreme Court in A.K.T.K.M. Vishnudatta Antharjanam vs. Commr. of Agrl. IT (1970) 78 ITR 58 (SC) : TC 38R.801. Accordingly, the sale proceeds of dead and flowered bamboos were not taxed as capital receipt. On appeal, the Tribunal accepted the order passed by the CIT(A).
  2. Before us, learned standing counsel appearing for the Department, submitted that the systematic exploitation of live bamboo clumps involves the cutting of the bamboos on their reaching the stage of optimum growth, leaving behind about a third of the length, which continues growing and repeating this process periodically till the clumps die. When this happens the dead and flowered bamboos have to be uprooted from inhibiting the growth of live bamboo clumps in the surrounding areas. According to learned standing counsel, the removal of the dead and flowered bamboos and the sale proceeds of the same would also amount to revenue in nature, taxable under the IT Act, 1961. However, counsel for the assessee submitted that the sale proceeds of the cutting of the periodical growth of the bamboos when they reached their optimum growth, was offered to tax as revenue receipt, but the sale proceeds of the dead and flowered bamboos were not offered for tax, since they are capital in nature. According to learned counsel, in the present assessment years under consideration, there is no sale of bamboos, which were cut when they reached their optimum growth. Since the dead and flowered bamboos were removed once for all, the sale proceeds of the same would be capital in nature. In A.K.T.K.M. Vishnudatta Antharjanam vs. Commr. of Agrl. IT (supra), the Supreme Court held that the sale of the trees affected the capital structure, because by removing the roots the source from which fresh growth of trees could take place was removed, and the sale could not, therefore, give rise to a revenue receipt. The receipt from the sale of the teak trees was capital in nature. Since, according to the facts arising in the present case, the sale proceeds consisting of the sale of dead and flowered bamboos, which were removed once for all, it cannot be considered as revenue in nature. As per the decision of the Supreme Court cited supra, the sale proceeds of the dead and flowered bamboos would only be in the nature of capital receipt. Accordingly, we answer the question referred to us in the affirmative and against the Department. No costs.
  1. A.K.T.K.M. VISHNUDATTA ANTHARJANAM vs. COMMISSIONER OF AGRICULTURAL INCOME TAX

SUPREME COURT OF INDIA

J.C. Shah, K.S. Hegde & A.N. Grover, JJ.

Civil Appeals Nos. 2327 and 2328 of 1968

5th May, 1970

(1970) 38 CCH 0201 ISCC

(1970) 78 ITR 0058

Legislation Referred to

Section 4

Case pertains to

Asst. Year 1963-64, 1964-65

Decision in favour of:

Assessee

Income—Capital vis-a-vis revenue receipt—Teak trees cut off along with roots with object of planting the land with rubber trees—Same resulted in change of capital structure of assessee—Receipt from sale of cut trees was capital receipt

Held :

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 a profit. 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 sale of such trees thus affects capital structure and cannot give rise to a revenue receipt.—CIT vs. Shaw Wallace & Co. (1932) 2 Comp. Cases 276 : 6 ITC178 : AIR 1932 PC 138 applied; A.K.T.K.M. Vishnudatta Antharjanam vs. Commr. of Agrl. IT (1969) 71 ITR 733 (Ker) : TC38R.804 reversed.

(Para 7)

Conclusion :

Receipts from the sale of teak trees which were removed together with their roots constitute capital receipt.

Counsel appeared:

K.P. Radhakrishna Menon, Sardar Bahadur Saharya, Vishnu Bahadur Saharya & Miss Yougindra Khushalani, for the Appellant : M.C. Chagla with M.R.K. Pillai, for the Respondent

A.N. GROVER, J.

These appeals by special leave from a judgment of the Kerala High Court arise out of the assessment of agricultural income of the assessee made under the Kerala Agrl. IT Act, 1950, hereinafter called the “Act”, in respect of the asst. yrs. 1963-64 and 1964-65.

  1. 2. For the asst. yr. 1963-64 the assessee filed a return showing a net agricultural income of Rs. 12,558.76. When the matter came up for hearing before the Agrl. ITO, another statement showing an amount of Rs. 43,250.00 as income from teak trees was filed. The Agrl. ITO disallowed certain expenses and assessed the income for the year 1963-64 at Rs. 62,021.00. For the asst. yr. 1964-65 a return was filed declaring a net agricultural income of Rs. 25,733.63. No income was shown from the sale of teak trees. The Agrl. ITO found that teak trees had been sold for a lump sum of Rs. 76,500.00 out of which Rs. 43,250.00 had been received in the previous year (1963-64) and he included the said amount in that year’s income. The balance amount of Rs. 33,250.00 was received in the previous year corresponding to the asst. yr. 1964-65. In determining the assessable income for that year this amount was added to the income which had been returned and after disallowing certain amount which had been claimed by way of expense the net income was determined at Rs. 61,041.00. The assessee filed appeals before the Addl. AAC who confirmed the assessment and dismissed the appeals. Further appeals were taken to the Agrl. IT Tribunal. The Tribunal held that the amount in dispute was agricultural income and not capital. The expenses which were claimed were also disallowed. On an application made under s. 60(1) of the Act the following two questions were referred to the High Court :

“(1) Whether, on the facts and in the circumstances of the case, the receipt from the sale of teak trees for the purpose of planting the area with rubber is capital in nature and exempt from Agrl. IT Act ?

(2) If the answer to the above question is in the negative, whether the expenses incurred in the prior years for the purpose of obtaining the said agricultural income is allowable as a deduction from the sale proceeds of the trees ?”

  1. 3. The High Court did not agree with the contention of the assessee that the amounts received by sale of the teak trees constituted capital and were not agricultural income. Certain amounts were, however, allowed as deductions by way of expenses for the asst. yr. 1963-64.
  2. 4. 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 High Court that the assessee planted the teak trees some time in the year 1946- 47. The form of the question itself showed that the trees were cut and completely removed from the land together with their roots for the purpose of planting rubber. There was no question of any further regeneration or growth of the trees which had been cut and removed. In other words there was no possibility of recurring income from these trees. In V. Venugopala Verma Rajah vs. CIT (1970) 76 ITR 460 (SC), the question before this Court was whether trees which had not been removed with the roots and the stumps of which had been allowed to remain in the land was in the nature of income. This is what was observed in that case :

“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.”

  1. 5. The present question was apparently left open and was not decided as the point which arose there did not relate to sale of trees of which the roots had also been taken out for the purpose of planting some other kind of trees e.g., rubber, as in the present case.
  2. 6. It seems to us that the well-known test laid down by the Privy Council in CIT vs. Shaw Wallace & Co. (1932) 2 Comp. Cas. 276 ; 6 ITC178 ; AIR 1932 PC 138 to find out whether a particular receipt is income is not satisfied in the facts and circumstances of the present case. According to that 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. The Bombay High Court in CIT vs. 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.
  3. 7. 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. But 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 a 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 sale of such trees thus affects capital structure and cannot give rise to a revenue receipt.
  4. 8. For the reasons given above, the answer to the first question will be in the affirmative and in favour of the assessee. It is unnecessary to return any answer to the second question. The appeals are accordingly allowed and the judgment of the High Court is set aside with costs. One hearing fee.

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