Case: V. Verghese and Another Vs. Commissioner of Income Tax, Kerala

In computing the income of the appellants 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 on 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 incomeAt the instance of the Commissioner of Income-tax, the Tribunal referred the following question to the High Court of Keralar, 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 negativeWe 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 forby the father of the appellant and this fetched an income of Rs. 75, 000. What the expressionmeant was not investigated by the Income-tax Officer. The Appellate Assistant Commissioner, in dealing with the contention raised by the appellant that the receipt was of the nature of a capital, observedhe 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 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 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 Officerthat the trees were not cut together with the roots but only 6 inches above the ground and that they were later on destroyed ,held that there wasnothing 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 ofAfter making an extensive quotation from the judgment of the High Court of Bombay in Commissioner of Income-tax v. N. T. Patwardhan, 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 appellantThe High Court observed thatit 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 felling is an expression with a definite and specific meaning as far as such forests are concerned . They then proceeded to quote rule 7 framed under the Madras Preservation of Private Forests Act, 1949, and after setting out conditions (b) and (c) observed thatthe felling of the trees under the clear fellingmethod 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 felling method should 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 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 expressionabout 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 felling of the trees not having affected the value of the properly 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 ofclear felling and thetrees, having been cut 6 inchesabove the ground and that they were later on destroyedit was a case ofclear felling and thereceipt was of capital nature. The High Court was of the view that theclear felling of forestlands meant cutting trees and not removal of the roots so that there would be regeneration, future growtth of the roots and the stumps and on that account the receipt was of revenue natureIt appears that before the Income-tax Officer the agreement dated September 11, 1957 was not produced. After the Appellate Assistant Commissioner remanded the case to the Income-tax Officer the latter submitted theand at that time the agreement was produced. The Tribunal in support of its conclusion referred to the preamble of thedocument 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 recordThee 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 toclear 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 is to be submitted within three months from the date on which the papers reach the Tribunal      [The matter again came before the court for hearing after the Tribunal submitted the supplementary statement of case.]

Reasoning: 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 routs. 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 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 caseThere is no suggestion that there were any Casuarina 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 Tribunal has found that by the use of the expressionit was stipulated that the trees are to be cut so that 6 inches 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 treesThe 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 commissionerx v. T. Manavedan Tirumalpad, 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 ae 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 thex Act, there is no logical reason for holding that income from sale of trees is not income liable to taxIn In re Ram Prasad 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, 1926 (3 of 1926)