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Judgment
Viswanatha Sastri, J.—The question that has been referred to us is whether on the facts and in the circumstances of the case, the Tribunal
was right in holding that the sum of Rs. 11242 derived by the assessee company on sale of timber was assessable Income.
The facts that have led up to this reference are these. The assessee is a limited company. Its main business is to cultivate and sell tea, coffee,
cardamom etc. in its estates. It purchased a tract of land part of which had already been cultivated with tea, the rest of it being a jungle capable of
being cleared and maae fit for plantation. The company cleared the jungle of trees in order to make the land fit for cultivation and sold the trees in
order to make the land fit for cultivation and sold the trees in the open market. The accounts of the company showed an income of Rs. 11242
received from sales of timber cut down from the jungle and sold. The Clearing operations started in 1939 and the trees that were cut were stocked
in the estate of the assessee. In October 1941 the company entered into an agreement with one Ma-mmu Hajee, a timber merchant, for clearing
the rest of the jungle of all trees and for the sale of the timber in the market.
The trees already cut by the company and stocked as well as those cut by Mammu Hajee, were transported to Kalai, which is a centre of the
timber trade in Matabar, and, there sold in open market as timber. A profit and loss account in respect of the timber deal was prepared which
showed a receipt of Rs. 7473-9-0 as Kattukanam by the assessee company. The expenses of cutting the trees incurred by Mamu Hajee came to
Rs. 8866-0-7 and the transport charges came to Rs. 10,956-11-0. There were other expenses incurred in connection with the transport and sale
of the timber. The price realised by the sale of timber was Rs. 39,215-0-1 and the resultant net profit of Rs. 8,817 less a deduction for a reserve
fund and for bonus to employees, was divided equally between the assessee Company and Mammu Hajee, each getting Rs. 3,877-11-10. The
total net realisation of the company from the sale of timber including the Kuttikanam amount credited to it in the accounts was Rs. 11242. It was
not and it could not be contended that the income derived from the sale of jungle trees of spontaneous growth was agricultural income. The
assessee company claimed that this sum was a capital receipt and therefore not liable to Income Tax as profits or gains.
Secondly, the company contended that the receipt of Rs. 11242 was a casual and non-recurring receipt and therefore exempt from Income Tax.
These con-tentions were negatived by the revenue authorities as well as the Appellate Tribunal. Hence this re-ference.
In our opinion, these contentions of the assessee company are untenable. Profits derived from capital which is consumed or exhausted in the
process of realisation are none-the-less taxable income, and this proposition has been well settled since the decision of the House of Lords in
''Coltness Iron Co. v. Black'', (1881) 6 A C 315. This principle has been applied to profits derived from the working of mines and minerals in
''Kamakshya Narain v. Commissioner of Income tax'' 22 Pat 713 nitrate deposits in ''Allanza Co. Ltd. v. Bell'' (1906) A.C. 18 and timber bearing
forests in ''Kauri Timber Co., Ltd. v. Commissioner of Taxes'' (1913) A .C. 171. In particular, it has been held both in this Court and in the Patna
High Court that income derived from I he sale of forest trees is not capital receipt and I s liable to tax even though there is an exhaustion of capital
assets in the shape of valuable and longstanding trees. ''Commr. of Income Tax, Madras v. Manavedan ''Tirumalpad'' 54 Mad 21 RAJA
BAHADUR KAMAKSHYA NARAIN SINGH Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., .
Mr. T. L. Venkatarama Aiyar, learned advocate for the assessee referred us to two decisions of the English Courts ''Van Den Berghs Ltd. v.
Clark'' (1935) A.C. 431 and ''British South Africa Co. v. Comr. of Income tax'' (1946) A. C. 62. In the first of these two cases two competing
companies manufacturing margarine entered into an arrangement to avoid competition between them, the arrangement extending over a
considerable period of time. The companies agreed to share their profits and losses in accordance with a very complicated scheme. On account of
differences between them tne agreement was put an end to, one of the companies paying the other a sum of Rs. � 450,000 by way of
compensation. The House of Lords held that the receipt of �. 450,000 was one of a capital nature and not a revenue receipt. The agreement in
that case, so far from being one made in the ordinary course of business, provided a fundamental organisation of the companies'' activities and
affected the entire conauct of the business of the companies. Therefore, money received for the cancella-tion of such an agreement which affected
the whole structure of the profit-making apparatus was held to be a capital receipt. Lord Macmillan observed:
It is important to bear in mind at the outset that the trade of the appellants is to manufacture and deal in margarine, for the nature of the receipt
may vary according to the nature of the trade in connection with which it arises. The price of the sale of a factory is ordi-narily a capital receipt, but
it may be an income receipt in the case of a person whose business it is to buy and sell factories.
Here the business of the company is not to sell the plantations which it acquires, but it is its avowed object and purpose to keep and develop teem
and sell the produce of the estates. Even though the existence of a large quantity of timber trees -- in this case they have realised a sum of Rs.
39215 --might have determined the price paid by the company for the acquisition of the estate, still the profits made by cutting down the timber
over a period of three years and making them marketable and selling them in the market are not a realisation of capital. . We consider that the
argument of the teamed advocate is merely an attempt to get round the well-known principle repeatedly laid down in Income Tax cases both in
England and here, that exhaustion of capital by the working of mines, quarries and forests, however it might be treated on strict actuarial principles
or on strict principles of economics, may for purposes of the levy of income tax be treated as profits. It is sufficient to refer to the decision of the
Judicial Committee in ''Kamakshya Narain v. Commr. of income tax'' 22 Pat 713. Lord Wright in delivering the judgment of Judicial Committee
observed:
If the receipts are income, it is not material for tax purposes that that for which they are paid comes from a wasting property. If the payment
ceases because the source ceases so does the tax. Once it is established that the royalties are income within the meaning of the Act it is not
material that the mines are in course of being exhausted unless there is provided in the Act that there should be a deduction from the income on that
particular ground.
5a. The further contention of Mr. Venkatarama Aiyar is that in computing profits arising from the sale of timber the cost of acquisition of the timber
must be deducted. Though the company paid a lump sum for the purchase of the entire estate of 2000 acres, still according to him, the cost will
have to be apportioned as between the land and the timber trees and the value of the latter should be deducted in arriving at the taxable profits. He
claims that the Kuttikanam or stump fee of Rs. 7473 represents the cost of the trees and this should be deducted in arriving at the balance of the
profits and gains of the company. In our opinion this is the old argument presented in another form, but it was sought to be supported by a
reference to the decision of the Judicial Committee in ''British South Africa Co. v. Commr. of Income tax'' (1946) A.C. 62. In that case a
company acquired numerous concessions in respect of minerals and mining rights in Rhodesia which the company turned to account by effecting
sales of mining rights in various plots of land to various persons and companies. The Judicial Committee held that the company was assessable to
Income Tax under the local income tax-law on its receipts from the sales of mining rights after deduction of the cost of acquiring such rights. The
company did not itself embark on mining operations But merely sold the mining concessions and advantages which it had acquired, to various other
persons and companies in return for a price. Therefore, in calculating the profits arising from the trade so carried on the cost price of the properties
sold was held to be deductible. In our opinion, this decision has no application to a case like the present where the company is not engaged in the
trade of buying and selling estates or plantations but its business is to turn to account the produce of the estate, both of the cultivated portions and
of the jungle, The company retains the whole of the estate and sells the trees which are the produce of the Jungle, and, tea, coffee and cardamom
which are the produce at the plantations. Even though the trees are cut and sold they may grow up again on the stumps left intact and new trees
may also spring up in the jungle and these trees can again be sold. This is what happens in Malabar. forests. Even if all the timber is sold away
beyond the possibility of any replenishment and the timber is considered as part of the original capital asset of the company as suggested by Mr.
Venkatarama Aiyar, in our opinion, the true analogy is to be found in cases where the courts have held that where the income of a taxpayer is
derived from the exhaustion of a capital asset, it is none-the-less income. In such cases no deduction can be claimed from the income in respect of
the diminuation or exhaustion of the capital asset from which that income is derived. The very case cited by Mr. Venkatarama Aiyar recognises the
difference between the case of a trader who buys mines and mining concessions and sells them for profit and a trader who retains a mine
purchased by him and exploits it for minerals which he sells in the market. In the latter case there is no provision for allowance for amortisation in
respect of the minerals which are exhausted by the working of the mines under the Indian Income Tax Act.
The further contention of the assessee is that the profits derived from the sale of timber by the company are of a casual and non-recurring nature
and therefore exempt from tax u/s 4(3)(vii) of the Act. But then, that very provision requires that the profits sought to be brought under the
exemption must not have arisen from a business, the expression ""business"" being defined as including any trade, commerce, or manufacture or any
adventure or concern in the nature of trade, commerce or manufacture. The receipt in the present case cannot be said to be a casual receipt in the
sense in which that expression is used in the Income Tax Act. The expression ""casual"" is defined in the Oxford Dictionary in these terms:
Subject to, depending on, or produced by chance; accidental, fortuitous.
Occurring or coming at uncertain times; not to be calculated on, uncertain, unsettled.
Subject to chance or accident.
The Articles of Association of the company, which we have seen, clearly show that the purchasing or taking on lease of estates, the clearing,
opening, planting, development and improvement of such estates, the cultivation of tea, coffee, cardamom, pepper and trees, and the selling of the
produce of the estates, were all included among the objects of he company. The purchase of an estate consisting of forest land as well as arable
land, the clearing of the forest land of trees and making the land fit for cultivation for tea, coffee, cardamom, rubber etc., was part of the normal
and ordinary line of business of the company. The jungle in the present case was purchased by the company with a view to its exploitation. The
land was cleared of the trees and the trees were cut and sized so as to be put on sale in the open market. They were sold in the timber market for
advantageous prices. A receipt of money which is known, foreseen, anticipated and worked for in the course, of carrying on a business is not a
casual receipt. This is not a casual profit made on isolated buying or selling of an article not amounting to a trade or business. This is not the case of
an individual selling a plantation after holding it for a considerable time at a price greater than what he paid for it. The assessee is a public company
whose sole ''raison d''etre'' is to have a business, to carry it on for profit and to divide the profit among the shareholders as dividends, ''prima
facie'', therefore any profit that the company makes otherwise than by sale of its plantations must be the taxable profit of its business. In the case of
the assessee company the object of its existence, is, among other things, to turn the forest to profit and thereby benefit its shareholders. The fact
that the operation of cutting the trees and selling timber may not be carried out again, or may not be carried out for a considerable time hereafter
does not make any difference. The company was formed to carry on this business of acquiring clearing and developing estates, clearing the land
purchased, of trees and selling them as timber. Necessarily the profits arising from these operations must be profits of the business of the company
and cannot be considered to be casual profits. When one is considering whether a certain form of enterprise is carrying on business or not it is
material to look and see whether it is a company that is doing it. Where a company or a partnership is formed for the purchase of large estates and
for clearing and developing the area and raising a plantation, there is a trade or business because you have that from which you would infer
continuity. The company is formed for that purpose and for nothing else. In this case the exploitation of the trees in the estate was made by the
company in partnership with a timber merchant and the operations of cutting and sizing the timber, transporting it for sale and selling it in the timber
market in Kallai were carried on in the same way as those which are characteristic of ordinary trade in the line of business of a timber merchant.
Consequently we hold that the profits realised from the sale of timber, including therein the Kuttikanam fee credited to the estate in the accounts,
are trade profits which are liable to Income Tax. They are not exempt from taxation as casual profits.
We therefore answer the question referred to us in the affirmative and against the assessee. The assessee will pay the costs of the Commissioner
of income tax on this reference which we fix at Rs. 250/-.