TaxTMI 
TaxTMI 
1944 (9) TMI 14
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....e not included in the assessable income of the assessee in the original assessment for the year 1938-39. This position, however, was received by Mr. N.H. Naqvi, Income-tax Officer, Gonda, who reopened the assessment for the year 1938-39 and by his order dated 27th February 1940 held receipts from the sale of forest trees to be the taxable income of the assessee. From this order of the Income-tax Officer the assessee appealed to the Appellate Assistant Commissioner of Income-tax, Lucknow, who by his order dated 31st March 1941 confirmed the assessment. 3. From the order of the Appellate Assistant Commissioner an appeal was preferred to the Tribunal which was heard by a Full Bench of three Members who agreed in dismissing the appeal. 4. The assessee has now applied to the Tribunal under Section 66 (1) of the Income-tax Act requiring it to state to the Chief Court of Oudh at Lucknow the following questions: "(1) That the consideration received from the sale of the forest was not "income" within the meaning of the Income-tax Act. (2) That as a general proposition income from the sale of trees grown or land inherited, purchased or acquired by gift or legacy is not taxable un....
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....se. Question No. 4 is in the form of a ground of appeal and can obviously not be referred. 9. Questions Nos. 1, 2, and 3 as formulated by the assessee raise the point whether receipts from the sale of forest trees are income or capital. We agree that in the circumstances of this case the question is one of law and that we must state it to the Chief Court. 10. In the order under Section 33 the Bench has found:- (1) that the land on which the forest trees grew was granted by the British Government to the assessee in full proprietary right and not on the condition that he would clear the jungle and bring the land under cultivation within a particular time or at any time; and (2) that the forest had since long been worked by the assessee in accordance with a scheme of profit making and that the assessee had been expending substantial amounts in the maintenance of the forest and deriving regular income therefrom. On these findings the question that arises and which we refer to the Chief Court is:- Whether the assessee's net receipts from the sale of forest trees were the assessee's income liable to income-tax or merely capita l converted into cash and not liabl....
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....essed to land revenue is agricultural income within the meaning of Section 2 (1) (a) of the Income-tax Act and exempt from income-tax under Section 4 (3) (viii) of the Act. 13. The assessee's Counsel admits that the third point, which of course is a question of fact, urged before the Tribunal in the appeal under Section 33, namely, that the income is of a casual and non-recurring nature, has not been formulated in the application for reference. Notwithstanding this, however, if a question on this part of the case had arisen out of the order of the Bench under Section 33 we would have stated it to the Chief Court if the assessee at the hearing of the application for reference had indicated to us the precise question of law that arose in the case and satisfied us that the omission to formulate the question in the application was inadvertent. But all that counsel could say at the hearing of the application was that in the period intervening between Mr. Harrison's Report of the Second Settlement (1898) and the commencement of the cutting of the forest in 1928 there is nothing to show that the forest was being worked in accordance with a scheme of profit making. But surely if....
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....Bankat, to which this forest land is attached, are situated in the Pargana of Ikauna in the district of Bahraich. A copy of the report of the second regular assessment of this Pargana by Mr. P. Harrison, Settlement Officer, Bahraich, has been filed by the appellant which contains a full history of this Estate. It appears from that report that the Raja-i-Rajgan of Kapurthala after the Mutiny was granted by the British government 56 wiran villages to hold them in proprietary right in reward for his services. With the promulgation of the Oudh Waste Rules according to which all waste belonged to Government, a question arose whether the forest lands in question were included in the Raja's Sanad and were thus the Raja's property or whether they should be treated as belonging to Government to be dealt with under the Oudh Waste Rules. After a good deal of correspondence between the Raja and the Government, the claim of Government to such forest lands was withdrawn and the Raja's title to it recognised. The report makes it clear that it had never been a condition of the grant that the Raja was to bring the waste under cultivation or lose the land. The following quotations from t....
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....nbsp; "I am directed to acknowledge the receipt of your letter No. 914, dated 30th ultimo and in reply to state that the Chief Commissioner approves of all the conclusions shewn in the 9th paragraph of your letter. He agrees with you in thinking that there can be little doubt that the whole of the tract in question was originally included in the 56 waste villages entered in the kuboolyat of the Raja of Kapurthala's sannad and he considers that no portion of it can now be taken away without giving the Raja good reason for complaining that the conditions of the grant have been infringed. The Chief Commissioner agrees with you and the Commissioner in thinking that the interest of the public are, to say the least, quite as likely to be well promoted by leaving the lands with the Raja, as they would be by giving them to any auction purchaser under the waste land rules.": Letter No. 1861, from the Secretary to the Chief Commissioner of Oudh to the Financial Commissioner, Oudh, dated 11th May 1866, at page 23. These extracts from the Settlement Report make it perfectly clear that the land was granted to the Raja without any condition ....
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.... decisions quoted at their Lordships' Bar, in which a sale of standing timber was coupled with the duty of its instant removal from the ground. And before approaching the construction of the New Zealand Acts it is expedient, in view of the arguments presented, to state the manner in which such rights are viewed under the common law. "It appears to the Board that the present case involves no refinement of distinction: for the transaction under which these timber rights were acquired was not one under which a mere possession of goods by a contract of sale was given to the appellant company, but was one under which they obtained an interest in, and possession of, land. So long as the timber, at the opinion of the company, remained upon the soil, it derived its sustenance and nutriment from it. The additional growths became ipso jure the property of the company. All rights of possession necessary for working the business of cutting or even for preserving uninjured the standing and growing stock of timber were ceded under the leases. All this, together with the business facilities for removal and sale, was granted to th....
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....when it ceases the capital may be gone, and with the going of the capital there will also go the subject and the possibility of the tax." (Pages 780-81). 7. It is true that the decision in this New Zealand case proceeded on the special language of the New Zealand Taxation Statutes which specifically tax income from timber; but the case expressly lays down certain general principles of common law which, in the absence of anything to the contrary in our own Act, must be deemed to be applicable to this case. 8. Coming now to the Indian decisions the first case of importance and which is not distinguishable from the present case is the Madras Full Bench decision in Manavedan Tirumalpad, Senior Raja of Nilambur v. Commissioner of Income-tax, Madras the Privy Council case cited above, been laid down that sums received by sale of timber trees of unassessed forest lands are income chargeable to revenue. It is true that the forest land in the Madras case was unassessed to land revenue; but the point is of no importance as the fact of the land being assessed to land revenue or not is not relevant to the question whether receipts from the sale of growing timber are capital or revenue bu....
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.... has been working upon the forests as a regular business proposition, and according to Section 4 (3) (vii) of the Income-tax Act a receipt from business is taxable even though it be of a non-recurring and casual nature. Further, the receipt in this case is not in fact of a casual or non-recurring nature. The Settlement Report shows that income from the sale of timber has been received since 1885; and, in any case, since the cutting that started in 1928 the forest has been a regular source of income to the Estate. In my opinion the fact that the forest ceased to exist with the last cutting does not make the receipt a receipt of a casual and non-recurring nature. For these reasons, I think, the income is not exempt under Section 4 (3) (vii) of the Income-tax Act. 12. I now come to the third point, namely, that the income in dispute is "Agricultural income" within the meaning of clause (a) of sub-section (1) of Section 2 of the Income-tax Act and therefore exempt from tax under Section 4 (3) (viii) of that Act. Clause (a) of sub-section (1) of Section 2 is as follows:- "'Agricultural inco....
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....ion the land itself cannot be said to be assessed to land revenue. The distinction between the assessment of land and the assessable assets is fundamental, and though that Act does not govern this case, has been clearly brought out in the United Provinces Land Revenue Act of 1902. The factors determining the amount of land revenue assessed on the land in question are thus described in para 26 of the Settlement Report:- "Additions for sayer are somewhat large. Excluding the ordinary receipt from hills and rivers and from thatching grass, on account of which I have added Rs. 1,248 to the assets, additions amounting to Rs. 6,194 have been made on account of the profits derived by the Kapurthala Estate from its forests. These forests consist mainly of inferior sal trees, with miscellaneous patches on the outskirts, and extensive grass savannahs. The Estate does not at present work the forests at any great profit. When it came into possession it found them in a very deteriorated condition and has now, for may years past, been working over them in accordance with a regular working plan. There is no go....
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....situated in pure forest mauzas or not, has been valued at these rates. The result has been, as above stated, an addition of Rs. 6,194 to the valuation of the pargana."***** It is abundantly clear from the entries in the Mahalwar Assessment Statements and the assessment remarks that no part of the land attached to these three villages is revenue free and that the whole of it has been assessed to land revenue. It is of no importance whatsoever for the purpose of determining the questions whether the land has been assessed to land revenue that in determining the amount of land revenue income from timber was not taken into consideration, though it appears from the extracts of the report of the second settlement reproduced above that income from the sale of timber was also taken into consideration in settling the land revenue. I must therefore hold that the respondent and the Appellate Assistant Commissioner was both wrong in holding that the land was not assessed to land revenue. 14. But the mere fact that the land from which the revenue is derived is assessed to land revenue is not sufficient to constitute the revenue agricultural income. the assessee claiming exemption for any ....
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....may be necessary to thin out the plantation. But, when the land is covered with trees which have to stand on it for a number of years, sometimes as long as a century, during most of which period the land itself is untouched, to describe that as agriculture appears to me inappropriate. To my mind it is something very different from the cultivation of a field or of an open space." Kesho Prasad Singh v. Sheo Pargash Ojha (I.L.R. 44 All. 19 on appeal to P.C. I.L.R. 46 All. 831) In the Patna case, Province of Bihar v. Maharaja Pratap Udai Nath##, referred to earlier in this order, it has in effect been held that "agriculture" and "cultivation" are interchangeable terms and that there is no agriculture where there is no cultivation. It has further been decided by that case that income from jungles or jungle land is not "agricultural income." The following observations occurring in the judgment of Harries, C.J., are worth reproducing as they represent a state of affairs which is very similar to that existing in the present case:- "Bankar-It appears that this head of income was derived from virgin jungles or jungle land not actually cultivated. A few forest guards appear to have b....
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....#39;s income liable to income-tax or merely capital converted into cash and not liable to income-tax ; and (2) Whether the income from the sale of forest trees of spontaneous growth growing on land which is assessed to land revenue is agricultural income within the meaning of Section 2 (1) (a) of the Income-tax Act and exemption from income-tax under Section 4 (3)(viii) of the Act. Section 4 (3) provides that income, profits or gains falling within certain classes shall not be included in the total income of the person receiving them, and class (viii) is agricultural income. "Agricultural income" is defined in Section 2 (1) (a) which reads : "(1) 'Agricultural income' means (a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land revenue in British India or subject to a local rate assessed and collected by officers of the Crown as such." The assessee's contention is that the land on which these trees grew was used for agricultural purposes. The assessment order of the Income-tax Officer, dated 27th February 1940, shows that the total receipts from the sale of timber amounted to Rs. 1,03,785, and that h....
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....ived on the first question. We may first state some further facts which axe relevant. The forest formed part of a grant by the British Government after the Mutiny. Doubt existed at one time as to the rights of the grantee in the forest land and as to the conditions upon which it was held, but the position was clarified in 1866. Quoting from extracts of the Settlement Report of that year the President of the Tribunal observed : "These extracts from the Settlement Report make it perfectly clear that to be land was granted to the Raja without any condition or qualification and was intended to : be enjoyed by him in any way he chose fit, there being no obligation on him to bring it under cultivation within a particular time or at any time. If the land had been granted to the Raja on the condition that within a specified time he would clear the jungle to make the land arable, the receipts from the sale of the jangle trees thus removed would perhaps not have been taxable; but the grant not being subject to any such condition it appears to me that this case does not differ from any other case where an assessee inheri....
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....of timber, excluded, is irrelevant. The forest has now ceased to exist and we have to consider first of ail whether the proceeds from this gradual extinction of what was undoubtedly capital can be considered income. One general principle governing such cases is now well settled, being found both in English and Indian authorities. It is that receipts from capital which is exhausted in the process of realization may be none the less income. It has been objected that certain authorities on which the Tribunal relied are not relevant as they relate to local enactments. Distinctions on some points may certainly be drawn, but the Tribunal has not overlooked this consideration. The objection was raised in particular with reference to the case in Kauri Timber Go, Ltd. v. Commissioner of Taxes*, where the question was whether a company which carried on in New Zealand the business of cutting, milling and selling timber and had acquired rights over land for that purpose could deduct for the purpose of income-tax under the New Zealand Land and Assessment Act, 1908, from the gross proceeds of its business the value of the standing timber which it had cut. It was said by Lord Shaw in that case....
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....x was not payable upon that part of the annual instalment which represented capital, but only upon the interest upon the unpaid portion of the capital. This case is clearly distinguishable and in no way affects the general principle. The payment of instalments was for a certain number of years; it was deferred payment of the purchase money, that is capital. The view that it was in substance an annuity was expressly repelled by their Lordships. On the meaning of the term "income" in the Income-tax Act, Commissioner of Income-tax v. Shaw Wallace and Co###. was cited. It was said by their Lordships of the Judicial Committee in this case that the term connotes a periodical monetary return, "coming in" with some sort of regularity, or expected regularity from definite sources; the source is not one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a windfall. The expansion into "income, profits and gains" is more a matter of words than of substance. The fundamental idea of "business" as a source of taxable income under Section 6(iv) is the continuous exercise of an activity: the....
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....though made in connection with a sale of the whole concern, might conceivably be treated as a taxable income.1' Under Section 4 (3) (vii) two conditions must be satisfied to obtain exemption. The receipts must not arise from the business and they must be of a casual and non-recurring nature. In the present case neither condition is satisfied. Mr. Wasim argued for the assessee that the trees were not sold in the course of business, but as a matter of capital realization. He also argued alternatively that at any rate the last sale should be regarded in this light. If, he said, trees had been again planted on the land, the position would be different. A forest and a mine can for this purpose be distinguished, in that while the trees of a forest can be replaced the coal in a mine cannot. At the same time he suggested that the sale of trees is equivalent to the sale of a coal mine, not merely of the right to work the mine. We have given these arguments careful consideration but are unable to hold that there is any force in them. The sale of a forest, including the land, would no doubt be parallel to the sale of a coal mine, as distinguished from the right to extract coal. But ....
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....on, only that this aspect should be taken into consideration if we entertained any doubt as to whether the income in question was derived from land used for agricultural purposes. The Assistant Commissioner looked at the matter from much the same point of view as the Income-tax Officer. We agree with what the President of the Tribunal has said about their orders. He has held that they were wrong in hold ing that the land was not assessed to land revenue, and he has explained why, on the finding that it is so assessed, the question now under consideration must be answered. He has referred to the instance given in the Income-tax Manual of income from the sale of timber being agricultural income and has expressed the opinion that this relates to income derived from regular forestry or sylviculture. We entertain same doubt about this, because if what counsel has told us is correct the instance was expressly included on account of an assurance given in the Legislative Assembly. At the same time Mr. Wasim did not contend that we are in any way bound by the illustration given in the Manual, nor did he very strenuously contend that we should be justified in taking into account what was ....
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....n of an open space. It is true that for the purpose of growing trees in a plantation it may be necessary first to prepare the land. Later on it may be necessary to protect and water the young plants. Still later it may be necessary to thin out the plantation. But, when the land is covered with trees which have to stand on it for a number of years, sometimes as long as a century, during most of which period the land itself is untouched, to describe that as agriculture appears to me inappropriate. To my mind it seems to be different from the cultivation of a field or of an open space." In Province of Bihar v. Pratap Udai Nath Sahi Deo [1941] 9 I.T.R. 313, Harries, C.J., observed: "Bankar."-It appears that this head of income was derived from virgin jungles or jungle land not actually cultivated. A few forest guards appears to have been employed to protest the property, but it cannot be said that the trees have grown as the result of cultivation. They appear to have grown naturally in the jungles without the intervention of human agency, and in my view the growth of these trees cannot be said to be the resu....
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....and from sthaljat (land used for stacking timber) is not income derived from land used for agricultural purposes and is liable to income- tax notwithstanding the Permanent Settlement Regulations, while Page, J., took the view that it was exemption on account of these Regulations. The view of Rankin, J., was upheld both by the Full Bench and by the Judicial Committee. Rankin, J., observed that some reference had been made to what had been called "a presumption against double taxation," and he said on this point that certain decisions, cited by him, only meant that a person should not pay the same tax twice, and he added: "That there is any legal presumption of a general character against 'double taxation' in any wider sense is a proposition to which I respectfully demur as a principle for the construction of a modern statute." Reliance was placed for the assessee on certain observations in the Full Bench Madras case in Chief Commissioner of Income-tax v. Zamindar of Singampatti #. It was held in that case that income from forest and fisheries were exempt under the terms of a sanad and also o....
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.... his view that such income is not assessable to income-tax. We have mentioned certain proceedings in the Legislative Assembly. While conceding that the general rule is that the Parliamentary history of an enactment is not admissible to explain its meaning, Mr. Wasim has referred us to para 19 of Vol. 31 of Halsbury's Laws of England, where it is said that "In construing a statute regard may be had to the exact state of the law and generally to all circumstances which can be proved to have surrounded Parliament at the time it was passed." He has also referred to the Federal Court case is In the matter of the Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 *. It was there held by two learned judges (Sulaiman, J., dubitante) that the proposals for Indian Constitutional Reform, commonly knows as the White Paper and the Report of the Joint Select Committee thereon, are historical facts, and their relation to the Constitution Act is a matter of common knowledge to which the Federal Court is entitled to refer. At the very most we consider that we are ent....