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H.H. Digverendrasinhji of Bansda Versus Commissioner of Income-Tax, Gujarat

1964 (8) TMI 79 - GUJARAT HIGH COURT

Income-Tax Reference No. 7 of 1963 - Dated:- 21-8-1964 - J. M. Shelat (CJ) And Bhagwati, JJ. For the Assessee : D. H. Dwarkadas with B. G. Thakore For the Commissioner : J. M. Thakore (Advocate-General) with M. M. Thakore and M. G. Doshi JUDGMENT J. M. Shelat, CJ. Two questions arise in this reference: "(1) Whether the two-thirds of the sale proceeds of the forest trees and forest produce sold by the assessee during the accounting year, Samvat year 2006, constitute capital receipt, and (2) .....

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te of Bombay. The assessee is the owner of certain forest lands situate in villages Sadaddevi, Ranifalia and Vaghai which were gifted to him by his father in Samvat year 2006, that being the relevant previous year. He sold the trees and other forest produce existing on these lands for a sum of ₹ 72,611. The assessee claimed that he had spent during that year in the aggregate the sum of ₹ 22,950 for clearing the said forest which amount was allowed as expenses. The dispute, therefore, .....

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st and forest produce of spontaneous growth worked out above is clearly not agricultural income within the meaning of section 2(1) of the Income-tax Act as the lands from which the said income is derived were not only not assessed to the land revenue in the taxable territories and not subjected to a local rate assessed and collected by the officer of the Government, but they were also not used for agricultural purposes. It is contended by Shri Jokhakar that the assessee received the lands as gif .....

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ficer before the Appellate Assistant Commissioner, and while the appeal was pending, he filed an affidavit of one Bhalchandra Hariprasad Upadhyaya, who was in the service of the Bansda State until about the year 1942. The affidavit was filed in support of the assessee's contention that the operations which he had carried out in the said forest lands constituted agricultural operations and that, therefore, the income derived by him from the said forest lands was agricultural income. In his af .....

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da State, like other State Governments, had a forest department consisting of guards and other staff not only to protect the forest from human beings and animals, but also to carry out "sylvicultural operations including marking of coupe, dibbling, planting, weeding, thinning and doing all types of cultural operations, pruning, digging, etc. and for these operations special skilled staff was kept and maintained by the then Bansda State for all the forests including those that stood on lands .....

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om the forests amounted to ₹ 72,611 and the expenses to ₹ 22,950 and the net income arrived at, namely, ₹ 49,661, represented the produce of spontaneous growth from the forests owned by the assessee. Though he did not agree with the Income-tax Officer that these lands were not assessed to land revenue, he confirmed the finding of the Income-tax Officer that the amount of ₹ 49,661 represented the sale proceeds of the spontaneous growth from the forests for which no agricul .....

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y the assessee would not constitute agricultural operations as they were performed only for the preservation and development of the spontaneous growth which had grown in the forest lands without any human effort or skill. He also observed that no evidence had been brought on record by the assessee to show that there had been cultivation of the soil on which the trees stood and the operations described by the assessee were merely the use of human labour and skill not expended for planting and gro .....

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s could not have been treated as taxable income. But the Tribunal observed that it was conceded that the gift was made a long time ago and that, therefore, between the date of the gift and the year of account, there was or must have been considerable spontaneous growth of trees which became a source of income to the assessee. The Tribunal, therefore, came to the conclusion that since part of the sale would relate to the trees which were in existence at the date of the gift, only two-thirds of th .....

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ese lands. Now the first contention raised before us by Mr. Dwarkadas was that the sale proceeds of the forest trees and produce were capital and not income receipts, that the lands and the trees standing thereon were the subject-matter of the gift in favour of the assessee and that therefore what was sold were the capital assets and the sale proceeds therefore amounted to conversion of part of the capital assets of the assessee. It was further contended that the Tribunal was in error when it he .....

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such an apportionment and there, perhaps, Mr. Dwarkadas is to a certain extent right. But what the Tribunal appears to have done, and which it need not have done, was to say that since part of the proceeds of sale must have been from the trees which were the subject-matter of the gift, the assessee should be given the benefit of doubt by a somewhat ad hoc apportionment. From the findings by the Income- tax Officer and confirmed by the Assistant Commissioner, the Tribunal could well have held tha .....

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gh the assessee's case was that it was agricultural income, and ₹ 22,950 were claimed as expenses. The fact that these forest lands have been for a long time with the assessee and during that long time, there must have been spontaneous growth on them, was never contested at any stage. The forest lands could not surely have been static in the sense that only the trees received by the assessee as gift together with the lands were the only trees that stood on these lands and nothing there .....

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us growth of trees must have taken place. Nevertheless, Mr. Dwarkadas's point that the entire sale proceeds, whether they were from the trees which originally stood on these lands or whether they were from those that grew spontaneously after the date of the gift, were capital receipts would still remain. In our view, however, there is a fundamental fallacy underlying the contention. There can be no doubt that when these lands together with trees standing thereon were gifted to the assessee, .....

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₹ 7,84,565 which included a sum of ₹ 84,993 on account of price realised by the sale of forest trees in his zamindari. The assessee's claim that the sale of the forest trees should be treated as sale of capital assets was rejected by the income-tax authorities, and one of the questions referred to the High Court was whether the assessee's net receipts from the sale of forest trees were his income liable to income-tax or were merely capital receipts. A Division Bench of the Hi .....

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e of forest trees must necessarily result in the diminution of the value of the assets of the assessee and for that reason the amount realised should be treated as capital receipt. To that contention the reply given by the Division Bench was that such an argument had been unsuccessfully advanced in the cases referred to therein and was similar to the argument advanced on behalf of this very assessee that royalties from coal mine should not be assessed to income-tax as the amount received resulte .....

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hich had already been cultivated with tea but the rest of it was jungle capable of being cleared and made fit for plantation. The company cleared the jungle of trees in order to make the land fit for cultivation and sold the trees in open market and the accounts of the company showed income of ₹ 11,242 received from sales of timber cut down from the jungle. The clearing operations started in 1938 and the trees that were cut were stocked in the estate of the assessee. In October, 1941, the .....

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t this amount was capital receipt and, therefore, was not liable to income-tax as profits or gains. The second contention raised by the company was that the aforesaid receipt was a casual and a non-recurring receipt and therefore exempt from income-tax. The High Court held that these contentions were untenable because profits derived from capital which was consumed or exhausted in the process of realisation were none the less taxable income and that that proposition had been well-settled since t .....

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ncome derived from the sale of forest trees is not capital receipt and is liable to tax even though there is an exhaustion of capital assets in the shape of valuable and long standing trees. The fact that the amount of ₹ 22,950 was claimed as expenses incurred during the account year and was allowed as such, shows that that amount was expended for fostering the growth of forest on these lands. It is not even the case of the assessee that he was maintaining the forests merely for their own .....

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ecision of the House of Lords in Coltness Iron Company v. Black [1881] L.R. 6 App. Cas. 315. It is thus clear that the Tribunal could have treated the entire amount of ₹ 49,661 as taxable income and merely because it gave benefit to the assessee to the extent of one-third of it, though no doubt on a somewhat ad hoc calculation, would not confer validity to the contention of Mr. Dwarkadas that the receipts were capital receipts. The second contention urged was that the amount of ₹ 49, .....

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regard to forests also. Relying on these observations, it was contended that the affidavit of Upadhyaya, which enumerates the various operations said to have been carried out in the forests of the Bansda State, including these lands, included, amongst other things, planting and dibbling, that these two operations would be the primary or the basic operations and, coupled with the rest, would constitute an integrated activity as envisaged in the case of Raja Benoy Kumar Sahas Roy [1957] 32 I.T.R. .....

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ommissioner of Income-tax v. Ramakrishna Deo [1959] 35 I.T.R. 312 ; [1959] Supp. 1 S.C.R. 176, where it was clearly stated that where an assessee claims that a certain income is agricultural income, the burden is upon him to show that it is so, that is, to establish that he had carried out an integrated agricultural activity as laid down in Raja Benoy Kumar Sahas Roy's case [1957] 32 I.T.R. 466 (S.C.). The question, therefore, is whether the assessee has discharged that burden. Now, it is no .....

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l income of the Bansda State was derived from forest, (2) that for that reason the State was maintaining a forest staff, (3) that the staff looked after the forests of the State including the forests in these villages, and, lastly, (4) that the duties of the members of that staff were to carry out sylvicultural operations, including marking of coupe, dibbling, planting, weeding, thinning, pruning, digging and doing all types of agricultural operations. The affidavit, however, suffers from two ma .....

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