COMMISSIONER OF INCOME TAX, RAIPUR vs. MAHENDRA KARMA, JAGDALPUR

ORDER (05.11.2012) The following order of the Court was passed by Abhay Manohar Sapre, J. Heard. (2) The decision rendered in ITA No.5/2004 shall also govern the disposal of the other connected appeals being ITA Nos.6/2004, 7/2004, 8/2004, 74/2003 85 75/2003, because in all these appeals common question of law is involved . (3) This is an appeal filed by the Commissioner of Income Tax (revenue) under Section 260-A of the Income Tax Act against the order dated 29.08.2003 passed by the Income Tax Appellate Tribunal, Nagpur Bench, Nagpur in (Assessment Year 1994—95). The appeal was admitted for final hearing on the following substantial questions of law:

(1) Whether in the facts and circumstances of the case, learned Income Tax Appellate Tribunal was justliled in holding that the receipts from the sale of trees/timber of spontaneous growth on account of Malik Maqbhuja timber transaction as Capital receipts? (2) Whether on the facts and in the circumstances of the case, learned Income Tax Appellate Tribunal was justified in treating the investment of Rs.8,38,000/— made by the assessee in agricultural land as explained for the Assessment Year 1994—95? (4) The assessee (respondent) purchased some agricultural land. On this land, some trees (Sagon — Malik Macbuja timber) were standing which were creating hindrance to the assessee in undertaking cultivation on such land. He, therefore, applied to the.Collect0r under Section 240 of the M.P. Land Revenue Code read with the Rules framed there-under and sought permission to cut the trees and then sell those trees as required under the Code/Rules. The Collector on consideration of the prayer made by the assessee granted him conditional permissio to cut and sell. In terms of the permission, the assessee was required to cut the trees in a manner so that the trees which are cut may regenerate in course of time and are not uprooted from all time to come and secondly, after cutting these trees, they will have to be sold only to the Forest Department of the State. The assessee ensured compliance of the terms of the permission so granted and after cutting them sold to the State (Forest Department) for Rs. l,94,238/—. n

(5) The question then arose before the Assessing Officer in assessment proceedings for the assessment years under consideration (1993—94 to 1997—98) as to whether the income earned by the assessee from the sale of the trees be treated as capital receipt or revenue receipt in the hands of the assessee. In other words, the question arose as to what is the true nature of the income earned by the assessee out of the sale of these trees and Whether it is chargeable to tax and if so under what head ? (6) The Assessing Officer was of the View that the income earned was essentially in the nature of revenue receipt in the hands of the assessee because it was a sale of forest produce of wild spontaneous growth of the Trees. The assessee felt aggrieved filed an appeal before the CIT (Appeal). The appellate authority did not agree with the View taken by the A.O. and held that the income received by the assessee from the sale of the trees in question was essentially in the nature of capital receipt and hence, not chargeable to tax. The revenue therefore filed an appeal to the Tribunal. The Tribunal upheld the view of the CIT (Appeals) and dismissed the appeal. It is against this order; the Revenue filed this appeal, which was admitted for final hearing on aforementioned questions of law. (7) Having heard the learned counsel for the parties and on perusal of the record of the case, we are inclined to dismiss the appeal and uphold the view taken by the CIT (Appeal) and the Tribunal. (8) In our opinion, the issue involved in this case need to be decided in the light of law laid down by the Supreme Court in a case reported in Commissioner of Income-Tax, Kerala v. Ambat Echukutty Menon, 120 ITR 70. (9) wRo) It is in this case, their Lordships while considering the issue on some What similar facts took note of earlier case law on the subject. The leading decision was rendered by Justice Untwalia to which Justice Pathak (as His Lordship then was) concurred. However, Justice Pathak in his concurring opinion explained the legal position arising in the case. We consider apposite to reproduce the concurring opinion of Justice Pathak to understand the legal position “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 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 falls within V. Venugopala Verma Rajah v. CIT (1 970) 76 ITR 460 (SC). 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 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 he 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 A.K.T.K.M. Vishnudatta Antharjanam v. Commr‘ of Agrz. LT. (1970) 78 ITR 58 (SC). 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 affected the capital structure, and could not give rise to a revenue receipt. In my opinion, the present case does not fall either within V. Venugopalan Antharjanam Rajah (1 970) 76 ITR 460 (SC) or A.K. T.K.M. Vishnudatta Antharjanam (1970) 781TR 58(SC). 1t 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.” (10) It would thus be clear by reading the law laid down quoted supra that if the trees which have a spontaneous growth are cut by the assessee from its root with no scope of its regeneration in future to give any kind of benefit to the assessee, then, the income earned out of sale of such trees can be regarded as capital receipt in the hands of assessee. If, however, a tree which has a spontaneous growth and easily capable of regeneration is cut in such a manner that it is regenerated in short span of time and start giving some benefits to the assessce then the income earned by sale of such tree can be‘ in appropriate cases regarded as revenue receipt.

8/ “w” gzx 3 , (11) What is therefore required to be seen whil examining the true nature of transaction is that first what was the intention of the parties (assessee) in selling the trees after they were cut /removed from the earth by the assessee, second the manner in which they were cut, third whether there were any chance of their spontaneous growth and regeneration and if so within what span of time, fourth, whether cutting and selling had any element of earning profit which assessee earned by its sale. It is these factors, which would constitute as to whether income earned would be a capital receipt or revenue receipt in the hands of assessee. (12) Applying the aforesaid principle of law to the facts of the case, it is clear to us that the transaction in question was rightly held to be in the nature of the capital receipt and hence, not chargeable to tax in the hands of assessee. (13) In the first place, the assessee was held to be an agriculturist and not found engaged in any business activity. Secondly, the cutting and selling of the trees was made after obtaining prior permission from the competent authority (Collector) under the M.P. Land Revenue Code read with Rules. Thirdly, the sale of the trees was made to the State. Fourthly, both ~ cutting and selling was governed by the provisions of the Code and Rules framed thereunder which inter alia provided that no one could either cut or/and sell any tree without obtaining prior permission of the competent authority. Fifthly, the price of the trees was determined by the State authorities in which the assessee had no role to play. In other words, it was not a private sale between the two parties and hence, there was no scope for any price negotiations. Sixthly, the Rules provided that the trees had to be cut in a particular e

mannsr and the same was also done by the assessee accordingly. Seventhly, the certiticate given by the Tahsildar (which was not disputed) in clear terms stipulated that so far as the trees in question are concerned, they would not regenerate in near future because they do not belong to the categories of a species which have a spontaneous growth. Eighthly, the land was put to use for cultivation by the assessee after cutting the trees. Ninthly, looking to the nature of trees (Sagan) which were cut above the root, it did not result in its spontaneous growth. This fact was ignored by A.O. and lastly, there was no evidence to show that any profit element in the transaction was noticed or that asseessee earned any profit. (14) In our opinion, therefore, in the light of these nine reasons, it is proved that the assessee did not intend to earn any profit out of the sale of such trees and nor his intention was to indulge in any profit making activity by sale of such trees. (15) In our opinion

therefore both CIT (Appeal) and Tribunal were right in their reasoning and the conclusion when they held that the transaction in question was essentially in the nature of capital receipt. Had the intention of the assessee was to make profit out of such sale then it could have been held as revenue receipt. Such was not the case here. (16) Learned counsel for the appellant (revenue) then brought to our notice one publication of news item mentioning therein that the assessee (respondent) was found indulging in some kind of illegal activities in cutting and selling the trees and that it had caused concern to the “M

State. Sufflce it to say, the State would always be free in such case to take appropriate action against the assessee in case if he or anyone through him is found to have engaged in any kind of illegal activities cognizable in law. There are no fetters on the powers of the State to probe any kind of illegalities, if found to have committed. So far as this appeal is concerned, the same has to be decided only on the basis of findings recorded by the taxing authorities from taxing point of View. This Court cannot travel beyond this and nor such issue can be made subject matter of this appeal. (17) So far as question No.2 is concerned, in our considered opinion, it is essentially a question of fact involving no issue relating to law much less substantial question of law. When the explanation given by the assessee of the investment made in the transaction found acceptance to the authority concern including to the Tribunal, then, this Court in its appellate juri iction cannot again probe in to sufficiency of factual explanation given.. It will amount to examining the factual appreciation of issues which is not permissible. In this view of'the matter, question No.2 stands answered against the appellant as not arising in the case being question of fact and not of law. (18) In the light of foregoing discussion, once we answer the main question in assessee’s favour and against the revenue (appellant) then it is not necessary to examine the second question framed in ITA No.5/2004 because the said question then becomes academic for its answer. In other words, once it is held that the assessee was not liable to pay any tax on the income earned out of sale of trees in 10 r /L\ question then the question of payment of any interest etc would not arise. (19) In View of foregoing discussion, the appeal is found to be devoid of any merit. It fails and is accordingly dismissed. (20) No cost. .m ”W " ’ l- ' _ Abhay Manohar Sapre G. MINHAJUDDFN ’ Judge ¥ x H J3/1 dge shyLa