Civil Appeal Nos
2242 2247 of 1972
Appeals by special leave from the Judgment and Order dated 1 12 1971 of the Kerala High Court in Income Tax Ref
No 2970 3070 71 92 97 and 9869
P A Francis G A Shah and Miss A Subhashini for the Appellant
section T Desai Mrs section Vaidyalingam J B Dadachanji Mrs A K Verma and Monjel Kumar for the Respondents
The following Judgments were delivered UNTWALIA J
These six appeals by special leave preferred by the Commissioner of Income tax from the judgments of the Kerala High Court are all inter connected and arise out of different proceedings in relation to one assessment year only
They have therefore been heard together and are being disposed of by this judgment
The assessee respondent is a Hindu undivided family owning large 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 coconut trees jack trees tamarind trees Maruthu etc
There were other trees of spontaneous growth but they were not in one block
They were interspersed among the paddy fields as the land aforesaid was meant for paddy 542 cultivation
By an agreement dated November 28 1960 the assessee sold to one Velappa 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 payments 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 Income Tax Act did not file any voluntary return
On February 28 1963 the Income Tax Officer 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 75000 during the relevant year
The corresponding assessment year would be 1961 62
The assessee was asked to explain why no voluntary return had been filed
In reply to the letter of the Income Tax Officer 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 affected with a view to extend wet or dry cultivation in its fields in the area the receipt 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 Income Tax Officer so desired he was ready to comply with his direction
Thereafter the Income Tax Officer served a notice on the assessee under section 148 of the Income Tax Act 1961 hereinafter called the Act
In response to the same the assessee filed a return on 2531966 showing a total net income of Rs 62663 paise for the previous year ending on 3131961
The Income Tax Officer 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 175000  although 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 agreement in that very year
He accordingly assessed the whole of the amount to income tax
The Appellate Assistant Commissioner allowed the appeal of the assessee in part and held that only a sum of Rs 75000  the amount actually received during the accounting year was assessable to income tax in the assessment year 1961 62
The assessee as well as 543 the department both preferred appeals before the Income Tax Appellate Tribunal from the order of the Appellate Assistant Commissioner
The Tribunal by its order dated the 16th November 1968 dismissed both the appeals
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 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  The High Court by its judgment since reported in Ambat Echukutty Menon vs Commissioner of Income Tax Ernakulam1 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
At the instance of the Revenue also the Tribunal made a Reference being Reference No 291970 and the question of law referred to the High Court is in the following terms Whether on the facts and in the circumstances of the case the whole of the sum of Rs 175000 was not assessable to tax in the previous year ending on 3131961 relevant for the assessment year 1961 62 Since the High Court in the main Reference opined that the receipt 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
The Income Tax Officer initiated penalty proceedings against the assessee one under section 271 1 a of the Act and the other under section 273 b 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 2711a 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 544 References were similarly made in relation to the penalty proceeding under section 273b
As 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 Appeals 2243 to Civil Appeals 2246 have been preferred by the department in these penalty proceedings
Since in our view for the reasons to be stated hereinafter the judgment of the High Court in the main Reference giving rise to Civil Appeal 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
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 Courts 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 Commissioner of Income tax Madras vs T Manavedan Tirumalpad1 a Full Bench of the Madras High Court held that the receipts from the sale of timber trees by the owner of unassessed 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 vs Commissioner of Income Tax CP  UP2 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 vs Commissioner of Income Tax Bihar and Orissa3 was also a case of the receipts from the sale of forest trees
In Fringford Estates Ltd Calicut vs Commissioner of Income Tax Madras4 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 the taxable income
545 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 Commissioner of Income Tax Bombay South vs N T Patwardhan1 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 the spontaneous growth
The receipts from such sales were held to be capital in nature
The Kerala High Court in State of Kerala vs Karimtharuvi Tea Estate Ltd2 was concerned with the sale of firewood of gravelia trees grown and maintained in tea gardens for the purpose of affording shade to tea plants
Even sale proceeds of forest trees failed for the purpose of coffee plantation in the land were held to be capital receipts by the Mysore High Court in the case of Commissioner of Income Tax Mysore vs H B Van Ingen3 and the Madras High Court in the case of Commissioner of Income Tax Madras vs M section P Nadar Sons4
Similarly sale of dead and wind fallen trees and trees planted for shades were held to be bringing receipts of capital nature vide Flixir Plantations Ltd vs Commissioner of Income Tax5 and Consolidated Coffee Estates 1943 Ltd vs Commissioner of Agricultural Income Tax Mysore6
In Commissioner of Income Tax Kerala vs Venugopala Varma Raja7 the Kerala High Court was concerned with the trees of spontaneous growth
Obviously the income was not agricultural income
The owner of a 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 along with 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 page 803
On that account it was held that it was a revenue receipt and 546 not a capital one
The case came up to this Court and the view of the High Court was eventually upheld
The decision of this Court is reported in V Venugopala Varma Rajah vs Commissioner of Income Tax Kerala1
A supplementary statement of the case was called for by 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 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 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 tress 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 section 43 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 question however of sale of trees with roots arose before this Court shortly after in A K T K M Vishnudatta Antharjanam vs Commissioner of Agricultural Income Tax Trivandrum2
Shah J as he then was who had delivered the judgment in Venugopala s case supra was a party in this case also the judgment of which was delivered by Grover J
The test laid down by the Privy Council in The Commissioner of Income tax Bengal vs Messrs Shaw Wallace and Company3 was applied and it was said at page 61 According to that test income connotes a periodical monetary return coming in with some sort of regularity or 547 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
 I am aware that the test laid down by Sir George Lowndes in Shaw Wallace case has been whittled down to a very large extent by subsequent pronouncements of the Privy Council eg in Gopal Saran Narain Singh vs CIT1 and Kamakshya Narain Singh vs CIT2 yet in the matter of sale of trees when this Court applied the same test in Vishnudatta s case it was for the purpose of laying stress 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 sold by uprooting the roots no body 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 trees 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 case 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
Clauses 12 and 13 of the agreement dated 28111960 entered into between the assessee and Velappa Rowther are as follows 12 The trees in the reared forest have to but cut neatly and the relative stumps should not be either pulled out or cut out
548 13 No 3 should not enter on the lands from where trees are cut or on the sprouts coming up from there
After the cuttings sprouts are not to be cut
 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 something 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 Income Tax Officer sent on 3 4 1963 the assessee perhaps was made aware of the decision of the Kerala High Court in Commissioner of Income Tax Kerala vs Venugopala Varma Raja 1 which was a case of private forest governed by the Madras Act
The assessee therefore claimed that there were no private forests in Cochin area of Kerala where the land was situated
The assessee asserted that in substance and in effect the sale was of the entire standing timber ie totality of the trees and the sale was effected with a view to extend wet or dry cultivation to that area as well 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 ME
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 holdings
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 also since our idea is to extend cultivation to this area as well
 The Tribunal in its appellate order noticed the argument of the assessee that its sole occupation was agriculture and the attraction in 549 the purchase of the land in the year 1905 was two irrigational channels contained therein
It also noticed the other facts stated in the letter aforesaid of the assessee and finally concluded on the basis of clauses 12 and 13 of the agreement It is clear from these that the assessee was reserving to itself the results of the future growth and a source of income
 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 upto 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 it would be noticed that without rejecting the assessee s stand that the transaction in question was the first and the last sale of trees by the assessee and 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 the departmental authorities that the receipt was a revenue receipt assessable to income tax
It should be noted that the assessment made was 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 a question of assessee s claiming any exemption and failing to get it for its alleged failure to furnish any more details
But it was a case where in order to net the receipt as a revenue receipt it was for the department to reject the assessee s stand and to hold that the object of the assessee in not allowing the licensee to cut the stumps and uproot the roots was a regeneration of the income
The High Court has also noticed the fact as found mentioned in the order of the Tribunal that by the time the assessment was completed by the Income Tax Officer an area of 10 acres had been converted into cultivable land
In our opinion therefore the High Court rightly distinguished the decision in Venugopala s case supra and applied the ratio of that of Vishnudatta s case supra
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 nonetheless 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
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
PATHAK J I agree with my learned brother that the appeals should be dismissed
And I shall set out my reasons
550 The case is one where trees of spontaneous growth were sold on condition that the purchaser would cut and remove the trunks without disturbing 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 would fall within V Venugopala Varma Rajah vs Commissioner of Income Tax Kerala1
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 the 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 that 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 had 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 not intend to permit regeneration of the trees and that the had in fact later put the land to cultivation the payments received on sale of the trunks cannot be regarded as taxable income
And yet the case is distinguishable from the facts in AKTKM Vishnudatta Antharjanam vs Commissioner of Agricultural Income Tax Trivandrum1 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 effected 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 Varma Rajah supra or AKTKM Vishnudatta Antharjanam supra
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
The appeals are dismissed but there is no order as to costs
NVK Appeals dismissed


Summary:
On a vast area of agricultural land owned by the assessee there were about 772 trees some of which were of spontaneous growth
Clauses 12 and 13 of the agreement by which the assessee sold some trees provided that the trees should be cut without pulling the stumps
The Income Tax Officer held that the trees were of spontaneous growth and assessed the whole of the income from the sale of trees to income tax
The Appellate Assistant Commissioner allowed the assessee s appeal in part holding that only the amount actually received during the accounting year was assessable to income tax
Appeals preferred by the assessee as well as the department to the Income Tax Appellate Tribunal were dismissed but references were made to the High Court on the question whether the receipts from the sale of trees of spontaneous growth were assessable to tax and if so whether assessable under the head other sources 
The High Court held that the receipts from the sale of the trees were of a capital nature and decided the references in favour of the assessee and against the department
Dismissing the appeals the Court  HELD per Untwalia J 1 The High Court rightly distinguished the decision in V Venugopala Varma Rajah vs Commissioner of Income tax Kerala and applied the ratio of that in A K T K M Vishnudatta Antharjanam vs Commissioner of Agricultural Income Tax Trivandrum 549F 2 In Venugopala Varma Rajah vs Commissioner of Income Tax Kerala  this Court held that if a person sells merely leaves or fruit of the trees or even branches of the trees it would be difficult 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 on income
By selling a part of the trunk the assessee does not necessarily realise a part of his capital
546A D E 540 3 In A K T K M Vishnudatta Antharjanam vs Commissioner of Agricultural Income Tax Trivandrum  a case of sale of trees with roots this Court applied the test laid down by the Privy Council in the Commissioner of Income Tax Bengal vs Ms Shaw Wallace and Co and held that 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 Although the test laid down by the Privy Council has been whittled down by subsequent pronouncements yet in the matter of sale of trees when this Court applied the same test in Vishnudatta s case it was for the purpose of laying stress on the object of the felling of trees
546G 547A C 4 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 sold 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 when the trees 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 would be that the owner did it with the object of regenerating the income
There can be cases like the instant one 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
547D F In the instant case the agreement dated 28 11 1960 indicates that the transaction was not a sale of trees with roots and stumps for clauses 12 and 13 of the agreement impose a prohibition that after the cutting sprouts were not to be cut
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
547G 548B C 5 In order to net the receipt as a revenue receipt it is for the department to reject the assessee s stand and to hold that the object of the assessee in not allowing the licensee to cut the stumps and uproot the roots was a regeneration of the income
By the time the assessment was completed by the Income Tax Officer an area of ten acres had been converted into cultivable land
549 E F per Pathak J concurring 1
The instant case does not fall either within V Venugopala Varma Rajah vs Commissioner of Income Tax Kerala or A K T K M Vishnudatta Antharjanam vs Commissioner of Agricultural Income Tax Trivandrum It is a case where although the stumps 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
550G 2
Where trees are felled and removed the stumps and roots are allowed to remain on the land with a view to regeneration of the trees the intention of the 541 owner would be to indulge in a profit making activity
The receipt from the sale of the trunks would be revenue receipts
550B 3
There was no intention in this case to reserve the stumps and roots for the purpose of allowing regeneration of the trees and the intention and subsequent conduct of the assessee established that the 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 that the trees were sold without stumps and roots cannot lead to the necessary inference that a profit making activity was involved
550C D 4
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 not intend to permit regeneration of the trees and that he had in fact later put the land to cultivation the payments received on sale of the trunks cannot be regarded as taxable income
550E