The Ouchterlony Valley Estates Ltd. vs The Commissioner of Income Tax

Ismail, J.—The income tax Appellate Tribunal, Madras Bench, u/s 256(1) of the income tax Act, 1961 has drawn up a case and referred the following question of law for the opinion of this Court.

Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sums of Rs. 30,294, Rs. 11,695 and Rs. 9,443 arising from the sale proceeds of standing shade trees are liable to tax under the head ''capital gains'' for the assessment years 1962-63, 1963-64, and 1964-65 respectively.

The Assessee is a public company owning extensive area of land on which coffee as well as tea is grown for the purpose of its business. In the years under consideration, shade trees were cut and sold by the Assessee. For the three assessment years, namely, 1962-63, 1963-64 and 1964-65 the sale proceeds of the shade trees amounted to Rs. 1,00,979, Rs. 33,413 and Rs. 26,900 respectively. The income tax Officer considered the sale proceeds to be capital receipts of the Assessee and, considering the rise in price of timber between 1st January 1954 and the accounting years relevant to the above assessment years, estimated the capital gains at Rs. 30,294 for 1962-63, being, 30 per cent of the capital receipts of Rs. 1,00,979, at Rs. 13,365 for 1963-64 being 40 per cent of the sale proceeds of Rs. 33,413 and Rs. 9,443 for 1964-65 being 35 per cent of the sale proceeds of Rs. 26,980. The contention of the Assessee that the amounts in question were not assessable u/s 45 of the income tax Act, 1961, was rejected by the income tax Officer. An appeal preferred by the Assessee to the Appellate Assistant Commissioner also failed except to the extent of the Appellate Assistant Commissioner estimating the capital gains a 35 per cent of Rs. 33,413 for the assessment year 1963-64. Further appeal preferred by the Assessee to the Tribunal also proved unsuccessful. It is thereafter, at the instance of the Assessee, the above question has been referred to this Court for its opinion.

The learned Counsel for the assesee contended that the definition of the term capital asset in Section 2(14) of the income tax Act, 1961 excludes agricultural land in India, from its scope, that, the standing shade trees would constitute agricultural land that therefore the said trees themselves would not come within the scope of capital asset and that consequently u/s 45, no capital gains assessable under the income tax Act accrued. In the alternative, the learned Counsel contended that the amounts would constitute agricultural income as d fined in Section 2(1) of the income tax Act, 1961 and on that score also it would not be assessable to tax under the income tax Act 1961. For the purpose of appreciating the above arguements it is necessary to extract the definition of the term capital asset occurring in Section 2(14) of the income tax Act, 1961, so far as the same is relevant for the purpose of this case, omitting those that are not relevant:

2(14) capital assets means property of any kind held by an Assessee, whether or not connected with his business or profession but does not include.

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(iii) agricultural land in India" Section 45(1) of the Act provides,-

Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53 and 54, be chargeable to income tax under the head capital gains, and shall be deemed to be the income of the previous year in which the transfer took place.

As we have pointed out already, the arguement is that the trees in question themselves are agricultural lands and that therefore they are outside the scope of the definition of the term capital asset as contained in the Act and that consequently they are outside the scope of Section 45 itself.

There is a direct decision of the High Court of Kerala on this point and against the Assessee, and that is Travancore Tea Estates Co. Ltd. Vs. Commissioner of Income Tax, . The question that came to be considered by the Kerala High Court was an identical, one namely:

Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the profit on the sale of shade trees is assessable as capital gains u/s 45 of the income tax Act, 1961

The Kerala High Court held that the trees in question would constitute property of any kind as contained in the Act in the definition of the term capital asset and that the same would not constitute agricultural land itself. The Court pointed out:

There can be no doubt that these trees are property and, therefore, will be property of any kind. The only question therefore is whether the trees can be said to be agricultural land The rule that ''what is attached to the land belongs to the land'' is a principle not applicable to India. The Judicial Committee of the Privy Council has said so very early Vallabdas Narainji v. Development Officer, Bandra AIR 1929 P.C. 163. This Court followed that decision in State v. Venkitasubramania Iyer AIR 1953 Tra. Coch. 349 and in Chellappan Nadar v. Krishnan Nair AIR 193 Ker. 297 and the Supreme Court approved the decision of the Privy Council in K.A. Dhairyawan and Others Vs. J.R. Thakur and Others, . We eannot therefore, postu late that the trees attached to the land belong to the land. It is difficult to say that trees are agricultural land in India.

Thus it will be seen that this decision of the Kerala High Court is directly in point and against the contention advanced by the learned Counsel for the Assessee.

However, the learned Counsel for the Assessee drew our attention to stray sentence occurring in the judgment of the Supreme Court in V. Venugopala Verma Rajah Vs. Commissioner of Income Tax, Kerala, . In that case the Court was dealing with receipts obtained by the Assessee by felling of the trees in the estate which fetched an income of Rs. 75,000 and the Supreme Court, while analysing the different opinions expressed by the High Courts in the country as to whether the income so realised would constitute capital receipt or revenue receipt observed:

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 u/s 4(3)(viii) of the income tax Act, 1922 to hold that the realisation 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 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.

Reliance, as we have pointed out already, is placed on the sentence underlined by us from the extract of the judgment. We are unable to hold that that sentence decides the question that the trees standing on agircultural land would themselves constitute agricultural land. As a matter of fact, the question with which the Supreme Court was concerned, was regarding the nature of the receipt-whether it is a Revenue receipt or a capital receipt and in that context it made a distinction between the sale proceeds of trees cut completely along with the roots and the sale proceeds of trees where trunks alone were cut, leaving the stumps intact which are capable of regeneration.

The question with regard to which the Supreme Court served its opinion has been subsequently considered by the said Court in A.K.T.K.M. Vishnudatta Andharjanam represented by D.V. Nambudripad Desamangalam Vs. The Commissioner of Agricultural Income Tax, Trivandrum, where it was held that when a tree was cut completely along the roots, the receipt from the sale of such tree was capital in nature. However, all that we are pointing out in this case is that the decision of the Supreme Court in V. Venugopala Verma Rajah Vs. Commissioner of Income Tax, Kerala, , referred to above does not hold that the trees standing on agricultural land themselves constitute agricultural land so as to be taken out of the definition of capital asset as contained in Section 2(14) of the Act.

That leaves the alternative arguement, namely that the . income in the present case would constitute agricultural income as defined in the Act. There is no controversy before us that the receipt in the present case was in the nature of capital receipt, because that has been conceded before the Tribunal itself, as seen from paragraph 8 of the order of the Tribunal in this case. Simi(sic) it has been found by the Appellate Assistant Commissioner who dealt with the appeals preferred by the Assessee that no operation in the nature of agriculture was involved in the growing of these trees. It is against the background of these findings of fact that we have to consider the question whether the income from the sale of shade trees can be said to be agricultural income at all. There is a short answer to this contention. The definition of the term ''agricultural income'' in Section 2(1) of the income tax Act, 1961, clearly shows that the income should be in the nature of a revenue receipt and not of a capital receipt. Once it is conceded that the receipts in the present case are capital receipts, it will automatically follow that they cannot constitute agricultural income. Further, what constitutes agriculture for the purpose of designating the income as agriculture income has been elaborately considered by the Supreme Court in Commissioner of Income Tax, West Bengal, Calcutta Vs. Raja Benoy Kumar Sahas Roy, . The Supreme Court has held that there must be an integrated activity which involves the basic operation prior to germination, involving expenditure of human skill and labour on the land itself as well as subsequent operations which foster the growth and preservation of the sprouts from insects and pests but also from depradation from outside, tending, pruning, cutting, harvesting rendering the product fit for the market, in order to constitute agricultural operations so as to designate the income derived from such operations as agricultural income. We have already pointed out that in this case no such operations have been carried on by the Assessee. Apart from this, the very decision relied on by the learned Counsel for the Assessee, namely, the decision of the Supreme Court in V. Venugopala Verma Rajah Vs. Commissioner of Income Tax, Kerala, , to which we have drawn attention already will show that the argument of the Assessee is not sounde In that decision, the Supreme Court has held that the income realised from the sale of the trees which were cut upto the trunk leaving the stumps intact was assessable to tax under the income tax Act. That could be only on the basis that such income was cot agricultural income as defined in the income tax Act, 1961.

Independent of the above inference to be drawn from the decision of the Supreme Court, the decision of the Kerala High Court to which we have already drawn attention namely, Travancore Tea Estates Co. Ltd. Vs. Commissioner of Income Tax, directly deals with the question and decides the same against the Assessee. In that case also an alternative arguement was put forward as it has been done in the present case. There also be argument proceeded on the basis of the receipt being capital receipt and the argument was that the income from agricultural capital asset would also come within the scope of agricultural income as defined in the Act. The Kerala High Court pointed out that the term agricultural income occurring in Entry 46 in List II of the Seventh Schedule to the Constitution and Entry 82 in List I of the same Schedule has to be understood in the light of the definition of the term contained in the income tax Act as provided for in Article 366 of the Constitution and observed:

In other words however wide may be the meaning that has to be attributed to the term ''agricultural income'' occurring in entry 46 of List II of the Seventh Schedule to the Constitution once it has been defined under the Act, the wide amplitude and ambit of the expression is of no avail, for the term, agricultural income'' in the items in the Lists has necessarily to be understood in the light of the definition of ''agricultural income'' in the Act. If this is so, the principle well established that constitutional entries should not be read in a narrow manner but must be given the widest amplitude will have no application for what we have to understand is the scope and ambit of the definition in the Act. So understood, there is no difficulty in excluding from the ambit of ''agricultural income'' the profits and gains arising from the transfer of the so-called ''agricultural capital assets''... In order to make these profits and gains ''agricultural income'' it appears that the definition of the term ''agricultural income'' in the Act will have to be changed by incorporating in the definition of a provision similar to Clause (vi) of the definition of ''income'' in Section 2(24) of the Act.

We are in respectful agreement with the above reasoning and conclusion of the Kerala High Court.

Under these circumstances, for the reasons mentioned above, we answer the question referred to us in the affirmative and against the Assessee. The Revenue is entitled to costs of this reference.