SALE OF SELF GROWN TREES- A WRONG DECISION BY ITAT WITHOUT CONSIDERING JURISDICTIONAL HIGH COURTS JUDGMENT The Tribunal can suo moto rectify the order to render justice.

[C.A. DEV KUMAR KOTHARI]

Relevant links and references:

Dilip Kumar Roy Versus Deputy Commissioner of Income-tax, Circle - 49 Kolkata 2011 -TMI - 203894 - ITAT KOLKATA  order  Dated – 13 April 2011 

CIT v. Amrik Singh 2008 -TMI - 3681 – (PUNJAB AND HARYANA HIGH COURT) – cited.

CIT v. B.C. Srinivasa Setty 1981 -TMI - 5845 – (SUPREME Court) – cited. 

CIT Vs. Suman Tea & Plywood Ind. 1997 -TMI - 17682 – (CALCUTTA High Court) – not cited by parties. 

Provisions of Income –tax Act, 1961- section and subject:

Sections  2 (1A)-Meaning of agricultural income,

S.10 (1) exemption of agricultural income,

S.14 distinct heads of income),

S. 28  scope of business income ,

S.45  Chargeability of capital gains ,

S.48  computation of capital gains and

S.56 - scope of income from other sources.

Case of Dilip Kumar Roy(Supra.)

In this case dispute centered around and matter argued pertained to business income, Other sources, capital gains  in relation to  the sale proceeds on sale of trees, which were self grown on the land of assessee. The AO considered the same as business income, CIT(A) held and ITAT confirmed the same to be income from other sources.

Sale of trees:

The observations and conclusion and decision of ITAT in relation to sale of trees by assessee are summarized , highlighted and discussed below for analysis:
There were  cross-appeals for assessment year 2006-07 by revenue and assessee.

Ground of appeal taken by assessee:‑

       (1) The assessee sold naturally green trees as part of the sale proceeds of land for a sum of Rs. 2,00,000 and claimed the same as income from capital gain. Later on, in view of two judgments of Madras and P. & H. High Court, it was claimed that the proceeds were non-taxable income.

Decision of lower authorities:

The A.O. held it to be business income and

the CIT(A) held it to be income from the other sources.

Observations and facts as noted by Tribunal:

  That assessee sold land and claimed capital gains.  (There seems no dispute on this issue)

  The assessee stated that there were trees which were self grown on the said land and these were also sold along with land computed its value at Rs. 2,00,000.

The assessee stated that there was no cost of acquisition and as such, sold value of trees is capital gain to assessee.

The assessee stated that the entire amount was invested in Bonds issued by NABARD and, as such, assessee is entitled for exemption as per provision of section 54EC of the Act.

The finding of CIT(A):  

             That assessee is not in the business of cultivation or horticulture.

              Growing trees and selling them is not his business.

              The trees were naturally gown trees.

             Hence, income received from naturally grown trees is not to be assessed under the head "profit or gains of business or profession" of assessee.

               That assessee was a partner in a firm M/s. D. K. Roy & Bros. and the business was taken over by assessee as proprietorship on its dissolution in 2001.

               Section 56 of the Act lays down that income of every kind and that does not come under the head income from salary, income from profit or gains of business, capital gain, income from property and which is not excluded from the total income under the Act, shall be chargeable to Income-tax Act under the head "income from other sources".

         Ld. CIT(A) has held that the said income of 2,00,000 received by assessee on sale of trees is to be assessed under the head "income from other sources".

Submissions on behalf of assessee and revenue:

1. Submission on the lines of submissions made before the authorities below were repeated.
2. Income arising on sale of trees has to be assessed under the head capital gain.
3.  CIT v. Amrik Singh 2008 -TMI - 3681 – (PUNJAB AND HARYANA HIGH COURT) and  CIT v. B.C. Srinivasa Setty 1981 -TMI - 5845 – (SUPREME Court) were relied on and it was submitted that if an assessee acquires an asset without incurring any cost, capital gain could not be taxable.
4. Ld. Departmental Representative supported the orders of the authorities below. He submitted that when assessee filed return, he did not show in the computation of sale of trees and only disclosed sale of land. He submitted that income arisen on sale of trees has right been held as "income from other sources" by Ld. CIT(A). He further submitted that the cases relied upon by Ld. Authorised Representative for the assessee are not applicable to the case of assessee as the case of Hon'ble Punjab & Haryana High Court (supra) states that if an asset on which no depreciation is claimed and there is no cost of acquisition of asset, capital gain should not be computed. He further submitted that the case of Hon'ble Apex Court in the case of Srinivasa Setty (supra) has no relevance to the case of assessee.

Tribunals observations and finding:

          We have carefully considered the orders of the authorities below.

          We have also gone through the cases cited by Ld. Authorised Representative for the assessee.

         We agree with Ld. Departmental Representative that the sale proceeds on sale of trees, which were self grown on the land of assessee, is not capital asset.

         We are of the considered view that Ld. CIT(A) has rightly held that sale proceeds on sale of trees is to be assessed under the head "income from other sources" and Assessing Officer was not justified to hold that it is to be held under the head "business income" because assessee is not in the business of growing trees and selling them.

            We agree with Ld. Departmental Representative that the cases relied by Ld. Authorised Representative (supra) have no relevance to the facts of the case before us. We hold that in the facts and circumstances of the case, there is no infirmity in the order Ld. CIT(A) and hence, ground No. 1 of the appeal taken by assessee is rejected. 

Thus, in conclusion Tribunal confirmed the order of the CIT(A) and held that the sale proceeds of trees was to be assessed as ‘income from other sources’. 

Points missed by assessee:

The possibility of considering sale proceeds of trees as a result of agricultural operations should have been examined. Suppose at some time some agricultural activities were carried and that resulted into cultivation of trees could be a ground to treat revenue arising from agricultural activity – not necessarily taxable as ‘agricultural income’ because after planting seeds there have been natural growth. 

The assessee should have also brought on record  details like type of trees, numbers of trees, height –width and  estimated age of trees to establish that they were ‘capital assets’ . 

Estimated age of trees would prove that trees were long-term capital assets because an immature tree below three years of age will hardly have value. In case there were trees below age of three years, the sale price could be separately ascertained after negotiation to treat the same as sale value of short term assets. 

That there was no cost of improvement and trees improved naturally over a period of time. 

Directly on point judgment of Calcutta High Court: 

As per reported judgment we find that the decision of jurisdictional High Court in the case of CIT Vs. Suman Tea & Plywood Industries p.   2008 -TMI - 17682 - CALCUTTA High Court

 226 ITR 34 (Cal) in which case departments SLP was also dismissed for lack of merit was not cited and relied on by assessee. This decision is directly on point of self grown and improved trees sold. 

In this case it was held that trees including tea bushes  are not part of land but separate capital assets. 

Trees of spontaneous growth are also ‘capital asset’ therefore sale would not result into revenue but will be on capital account/ capital  receipts. 

When trees were of spontaneous growth / self grown nature and  they   did not cost by way of cost of acquisition and / or cost of improvement,  sale proceeds were not  taxable as ‘capital gains’. 

After considering several judgments of the Supreme Court and High Courts the Calcutta High Court concluded that     “ The logic behind these judgments is basically that if there is no cost of acquiring an asset or improving the same, it cannot be assumed that sale of such an asset will bring in any gain or profit”. 

Relevant question and courts important observations are summaried below:

Question No. 3 in Income-tax Reference No. 201 of 1991 raised in R. A. No. 574/(Cal) of 1990 is as follows :

            " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the profit on the sale of the timber is neither assessable as capital gains nor assessable as a taxable income ?"

According to section 45 of the Income-tax Act, there has to be some profit or gain from the transfer of a capital asset and only that profit or gain is chargeable to income-tax under the head " Capital gains ".

According to section 48 of the Act, as was then applicable, capital gain shall be computed by deducting from the full value of the consideration received, the cost of acquisition of the asset and the cost of any improvement thereto.

This is because, if a property was purchased for Rs. 100 and sold for Rs. 100, there cannot be any gain and similarly if a property was acquired for Rs. 100 and was improved upon by spending a further sum of Rs. 100 and was sold at Rs. 200, the sale realisation will be equal to the cost of the capital and there would be no gain by such sale.

 The subject trees were claimed to be and accepted as " of spontaneous growth ". The lower authorities proceeded on the basis that the cost of acquisition is nil. Before the Tribunal no contrary stand was taken. Although the Commissioner of Income-tax (Appeals) observed that there is no indication to show that the appellant had not spent a pie on the growth of the trees, i.e., on the improvement of the capital asset, he did not make any endeavour to find out as to what was spent on the improvement.

The records of the case do not contain any evidence in regard to the cost of improvement. Therefore, the trees of spontaneous growth as claimed by the assessee and as accepted by the Revenue had no element of cost of acquisition or cost of improvement.

In CIT v. B. C. Srinivasa Setty 1981 -TMI - 5845 – (SUPREME Court), the Supreme Court held that the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purpose of income-tax. In that judgment, the Supreme Court observed that all transactions encompassed by section 45 must fall under the governance of its computation provisions. It further observed that a transaction to which those provisions cannot be applied, must be regarded as never intended by section 45 to be the subject of the charge. It then explained that what is contemplated by section 48 is an asset in the acquisition of which it is possible to envisage a cost ; it must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it and none of the provisions pertaining to the head " Capital gains " suggests that they include an asset in the acquisition of which no cost at all can be conceived. It, thereupon, observed that goodwill generated in a new business if sold and the consideration brought to tax, what is charged is the capital value of the asset and not any profit or gain. It also observed that the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gain.

In A. Gasper v. CIT 1991 -TMI - 5344 – (SUPREME Court), the Supreme Court dismissed the appeal on the ground that the contention having been raised before the Tribunal and the same having been declined by the Tribunal was not thereafter raised or argued before the High Court, but in doing so observed that the contention raised on behalf of the assessee to the effect that even assuming that the assessee had a capital asset and consideration had been received for relinquishment of some part of his rights in respect thereof, the entire consideration could not have been brought to tax since capital gains have to be computed under section 48 of the Income-tax Act, which presupposes a reduction, among others, of the actual cost of the asset to the assessee and that the monthly lease of the premises, which the assessee was enjoying, was not acquired by him at any ascertainable cost ; and that even assuming that it was a capital asset, it was a capital asset of such a nature that its actual cost of acquisition cannot be ascertained, have great force and if they were open to be raised before the Supreme Court, the Supreme Court may have to decide the same in favour of the assessee. In that case, the Supreme Court was concerned about relinquishment of a part of a leasehold right in an immovable property.

In CIT (Addl.) v. Ganapathi Raju Jogi 1993 -TMI - 40168 – (SUPREME Court), route permits for buses granted by the road transport authority' were transferred. No amount was paid for acquiring the subject route permits. It was only after a number of years that the route permits acquired some value because of various factors, namely, development of roads, passenger traffic, frequency of buses, etc. The value of the permit could not be evaluated as on the date of acquisition. In such circumstances, the consideration in terms of money as realised on its transfer could not be brought to tax as capital gains. This is what the Andhra Pradesh High Court held in CIT (Addl.) v. Ganapathi Raju Jegi, Sanyasi Raju 1976 -TMI - 37483 – (ANDHRA PRADESH High Court). The Supreme Court dismissed the appeal preferred against the said judgment of the Andhra Pradesh High Court following its decision in CIT v. B. C. Srinivasa Setty 1981 -TMI - 5845 – (SUPREME Court).

The logic behind these judgments is basically that if there is no cost of acquiring an asset or improving the same, it cannot be assumed that sale of such an asset will bring in any gain or profit.

This High Court in CIT v. Octavious Steel and Co. Ltd. 1995 -TMI - 18414 – (CALCUTTA High Court), held that the cost of acquisition of an asset, be it a capital asset or any other asset must be understood in its common sense, that is, it must represent the expenditure incurred in acquiring the asset. Here, this court was involved in relation to transfer of a tenancy right. The court held that there is no means by which the cost of the tenancy right itself, which was increasing in value over the time, could be ascertained, nor could the cost of improvement in such asset be determined. This was because, we are of the view, that there was no cost involvement on the part of the assessee either for acquiring the asset or for the improvement, which was by way of a natural process.

In CIT v. H. H. Maharaja Sahib Shri Lokendra Singhji 1986 -TMI - 26367 – (MADHYA PRADESH High Court), the Madhya Pradesh High Court held that liability to pay tax on capital gains would arise in respect of only those capital assets in the acquisition of which an element of cost is either actually present or is capable of being reckoned and not in respect of those assets in the acquisition of which the element of cost is altogether inconceivable. In that case the assessee had sold some lands which were part of the property inherited by him from his forefather to whom the property had been gifted by a Moghul Emperor.

In Sri Krishna Dairy and Agricultural Farm v. CIT 1987 -TMI - 25399 – (ANDHRA PRADESH High Court), the Andhra Pradesh High Court was concerned with a case where the assessee doing dairy farm business had sold cubs which were not acquired at any cost. The Andhra Pradesh High Court held that the birth of cubs was incidental to the business activity of the assessee and though it is difficult to visualise them as assets, there was no cost of acquisition of the cubs and, therefore, the gains which arise on such sale were not liable to tax as capital gains.

Trees of spontaneous growth are such trees which are not sown. They grow naturally. Its growth also depends on the nature. Since it grows on the land belonging to an individual he claims to be the owner of such natural wealth. At the time when the sprouts come out from the seeds which have blossomed naturally, they have no value at all. As the nature nurtures and cares such sprouts they grow and ultimately become giant trees. The human needs the trunk and branches of those trees for various purposes. As the tree grows naturally, its value appreciates having regard to the nature of the human demand for its trunk and branches. In respect of such a tree neither any cost of acquisition nor any cost of improvement can be foreseen. If that be so, then the sale proceeds of such a tree will not bring in any profit or gain and as such will not be taxable as capital gains.

In CIT v. E. C. Jacob 1972 -TMI - 8672 – (KERALA High Court), the Full Bench of the Kerala High Court held that what is charged under section 45 of the Income-tax Act, 1961, is the profits or gains arising from the transfer of a capital asset and in computing the profit or gain in accordance with the provisions of section 48 of the Act, the cost of acquisition of the capital asset and the cost of any improvement thereto have to be deducted from the full value of the consideration for the transfer of the capital asset and that in the context of the Income-tax Act the expression " cost of acquisition " signifies some expenditure or outlay in terms of money by the assessee in the creation or acquisition of the concerned capital asset. This view of the Full Bench of the Kerala High Court was approved by the Supreme Court in B. C. Srinivasa Setty 1981 -TMI - 5845 – (SUPREME Court).

Therefore, if there be no cost of acquisition or cost of improvement of the trees which have grown spontaneously with the aid of nature, while the value thereof has been increased by reason of such natural growth coupled with human demand, the sale proceeds of such asset will not fetch any gain or profit and therefore will not be capital gains.

The Supreme Court in A. K. T. K. M. Vishnudatta Antharjanam v. Commr. of Agrl. I T. 1970 -TMI - 6217 – (SUPREME Court), held that the sale of the trees affected the capital structure, because by removing the roots the source from which fresh growth of trees could take place was removed, and the sale could not, therefore, give rise to a revenue receipt ; the receipt from the sale of the trees was therefore capital in nature. In the case at hand, it has not been disputed that the trees were removed with their roots for the purpose of making space for cultivation of tea.

In CIT v. Ambat Echuhutty Menon 1979 -TMI - 5211 – (SUPREME Court), the trees were spontaneously grown on agricultural land, which interspread among paddy fields, and were cut and sold but the roots and stumps were left out to extend cultivation and not for development or for regeneration. The Supreme Court held that the receipt from sale of such trees is capital receipt.

In that view of the matter the sale proceeds of the trees of spontaneous growth received by the assessee being receipt of capital nature, cannot be assessable as taxable income.

In that view of the matter, we answer question No. 3 in Income-tax Reference No. 201 of 1991 raised in connection with R. A. No. 574/(Cal) of 1990, in the affirmative and in favour of the assessee.

SLP  in case of Suman Tea was dismissed:

The revenue preferred appeal before the Supreme Court and the Supreme Court dismissed the appeal for delay and lack of any merit. Therefore, the Judgment of Calcutta High Court has attained finality and merged in judgment of the Supreme Court and is binding all over India.

The case is a fit case for rectification:

The Tribunals are for rendering justice, the members of Tribunal are experts in the law about which they hear cases and decide appeals. Therefore, to render justice, the Tribunal should consider the law on the following lines:

1. What is law as per language used?
2. What is law as per judgments of Supreme Court and other high courts and particularly the High Court of the judicature?
3. What are views taken on similar issues by other benches of Tribunal and particularly co-ordinate benches of the  Tribunal.
4. In case, the parties have failed to cite any judgment, the Tribunal cannot ignore the applicable law. Therefore, even if party before it failed to cite a relevant judgment, the Tribunal can apply / must apply the law correctly as per binding judgments. Off course, in such situation, the Tribunal to be fair and reasonable can  re-fix the case for further hearing or for clarification and providing opportunities to parties, particularly the party who will be adversely affected due to consideration of a judgment which has not been cited before the Tribunal.

As the decision of the Tribunal is not in accordance with law, the Tribunal can suo moto  recall its decision and decide the appeal afresh after allowing parties opportunity to hear and represent their case.

The assessee can make an application u/s 254(2) and can contend that there are mistakes apparent from record because:

Assessee had claimed that trees were capital asset and relied on judgments according to which trees are ‘capital asset’.

The Tribunal has not found that trees were not capital asset. In fact Tribunal has not at all dealt with the issue.

Once trees are capital asset, the head ‘capital gains’ shall apply and  any other head of income cannot be applied. 

Judgment in case of Suman tea has not been applied.

Tribunal has wrongly held that  the sale proceed of trees was income from other sources. This is totally incorrect. In Suman Tea it has been held that sale proceeds of trees is not revenue.

The decision of Tribunal , if not rectified will lead to injustice to the assessee.