1979 (9) TMI 2 - SC - Income Tax

Supreme Court rules tree sale proceeds not taxable as income, distinguishing capital from revenue receipts.

Commissioner of Income-Tax, Kerala Versus Ambat Echukutty Menon

The Supreme Court affirmed the High Court's judgment that receipts from the sale of trees of spontaneous growth were of a capital nature and not taxable ... Whether the receipts from the sale of trees of spontaneous growth were assessable to tax and if so, whether assessable under 'other sources' - It 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 - appeal of revenue is dismissed Issues Involved:1. Taxability of receipts from the sale of trees of spontaneous growth.2. Nature of the receipts (capital or revenue).3. Applicability of penalty proceedings under sections 271(1)(a) and 273(b) of the Income Tax Act.Issue-wise Detailed Analysis:1. Taxability of Receipts from the Sale of Trees of Spontaneous Growth:The primary issue was whether the receipts from the sale of trees of spontaneous growth were assessable to tax. The Income Tax Officer (ITO) held that the entire amount of Rs. 1,75,000 received from the sale of trees was taxable as income. The Appellate Assistant Commissioner (AAC) partially allowed the assessee's appeal, assessing only Rs. 75,000, the amount actually received during the accounting year. Both the assessee and the department appealed to the Income Tax Appellate Tribunal, which dismissed both appeals. The Tribunal referred the question to the High Court, which answered in favor of the assessee, stating that the receipts from the sale of trees were not taxable as they were of a capital nature.2. Nature of the Receipts (Capital or Revenue):The High Court's judgment, which was upheld by the Supreme Court, distinguished between capital and revenue receipts. The judgment referenced various precedents, including:- CIT v. T. Manavedan Tirumalpad: Receipts from the sale of timber trees were treated as revenue.- Maharaja of Kapurthala v. CIT: Net receipts from the sale of forest trees were considered income.- CIT v. N. T. Patwardhan: Sale of trees with roots was held to be capital in nature.- V. Venugopala Varma Raja v. CIT: Receipts from the sale of trunks, where stumps were left for regeneration, were revenue receipts.- A. K. T. K. M. Vishnudatta Antharjanam v. Commr. of Agrl. I.T.: Sale of trees with roots, where no regeneration was possible, was considered capital.In this case, the Supreme Court found that the object of the assessee in not allowing the stumps and roots to be cut was to protect the land for future cultivation, not for the regeneration of trees. Therefore, the receipts were of a capital nature.3. Applicability of Penalty Proceedings under Sections 271(1)(a) and 273(b) of the Income Tax Act:The ITO initiated penalty proceedings against the assessee for failure to furnish the return and estimate of advance tax. The High Court, following its main judgment, disposed of these penalty-related references in favor of the assessee. The Supreme Court upheld this view, stating that since the main appeal failed, the penalty appeals also failed as a corollary.Separate Judgments:- UNTWALIA J.: Emphasized that the sale was not for the purpose of generating income through regeneration of trees but to protect the land for cultivation. The judgment referenced various precedents and concluded that the receipts were capital in nature.- PATHAK J.: Agreed with the dismissal of the appeals, highlighting that the intention behind not removing stumps and roots was to protect the land for cultivation, not for profit-making through regeneration. This distinguished the case from others where receipts were considered revenue.Conclusion:The Supreme Court dismissed all six appeals, affirming the High Court's judgment that the receipts from the sale of trees were capital in nature and not taxable as income. There was no order as to costs.