Case: Commissioner of Income Tax, Kerala Vs. Ambat Echukutty Menon

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 K arimpana, 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 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 chargeabl e 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. 75, 000/- 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 ofthe Income-Tax Act, 1961, hereinafter called the Act. In response to the same the assessee filed a return on 25.3.1966 showing a total net income of Rs. 626.63 paise for the previous year ending on 31.3.1961. 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 t he amount of Rs. 1, 75, 000/-, although the whole of it was not paid during the accounting year, represented the assessees 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 75, 000/-, the amount actually received during the accounting year, was assessable to income-tax in the assessment year 1961-62. The assessee as well as 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 v. Commissioner of Income-Tax, Ernakulam(1) 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. 29/1970 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. 1, 75, 000/- was not assessable to tax in the previous year ending on 31.3.1961 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 271(1)(a) of the Act, two References were made to the High Court, one at the instance of the Revenue and the other at the assessees instance and two References were similarly made in relation to the penalty proceeding under section 273(b). 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 prefer red by the department in these penalty proceedings.

Court's reasoning:
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 agreementThe 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 fieldsIn 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 v. Venugopala Varma Raj a (1) which was a case of private forest governed by the Madras ActThe 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 th e sale was of the entire standing timber i.e. 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 a ssessee alsos 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 M.E. 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 t o this area ase Tribunal in its appellate order noticed the argument of the assessee that its sole occupation was agriculture and the attraction in 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 thet is clear from these that the assessee was reserving to itself t he 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 Venugopalas 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 assessees 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 assessees 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 assessees 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 Venugopalas case (supra) and applied the ratio of that of Vishnudattas 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 Vishnudattas case.