The Judgment of the Court was delivered by

Govindan Nair, J.:— This is a reference under section 256(1) of the Income-tax Act, 1961. The question referred is:

“Whether, on the facts and in the circumstances of the case, the receipts from the sale of trees of spontaneous growth were assessable to tax and if so, whether assessable under ‘Other sources’?”

2. The year of assessment is 1961–62, the corresponding accounting period being that which ended on March 31, 1961. The Tribunal decided the question against the assessee by holding that the receipts from the sale of the trees is income assessable under the head “Other sources”. The assessee is a Hindu undivided family which owns large agricultural lands. In 1905 it took in court auction some lands covering an area of 200 acres. In the lands so taken, there were two irrigational channels drawing water from a river. According to the sanad, there were about 772 trees of various kinds like karimpana, cocoanut trees, jack trees, tamarind trees, maruthu, etc. These were not in one block but were interspersed among the paddy fields. There were other trees of spontaneous growth. By an agreement dated November 28, 1960, the English translation of which is annexure “A”, the representatives of the assessee sold to one Velappa Rowther trees from about 60 acres of the land obtained by the assessee in court auction on certain terms and conditions mentioned in that agreement, annexure “A”. Two clauses of this agreement which have been relied on for the Tribunal for holding that the sale price is income are those in clauses 12 and 13 which we may extract:

“(12) The trees in the reared forest have to be cut neatly and the relative stumps should not be either pulled out or cut out.

(13) No. 3 should not enter on the lands from where trees are cut or on the sprouts coming up from there. After the cuttings sprouts are not to be cut.”

3. No. 3 referred to in clause 13 is the said Velappa Rowther. The terms relating to payment stipulated in annexure “A” were not adhered to by Velappa Rowther. There were further agreements deferring the payments to be made by Velappa Rowther. These are not very important for the purpose of answering the question but will be relevant in the connected Income Tax Referred Case No. 29 of 1970 and will be referred to in dealing with that case. According to the assessee, the agreement dated November 28, 1960 (annexure “A”) was entered into “with a view to extend wet or dry cultivation to that area as well, since the standing trees were a hindrance for such extension”. This was mentioned in a letter dated April 3, 1963, addressed on behalf of the assessee to the Income-tax Officer in answer to a communication dated February 28, 1963, sent by the Income-tax Officer. In that letter, after mentioning the purpose for which the agreement for felling of trees was entered into, it was again repeated:

“After purchase of the lands we had developed the same and in that process we sold the trees with the object mentioned above. The present sale has been the only sale and it will be the last sale also since our idea is to extend cultivation to this area as well.”

4. The assessee mentioned that this purpose was implemented and even at the time of the assessment, 10 acres out of the 60 acres had already been converted into agricultural lands. Based on these facts, contentions were raised before the Tribunal which were noticed by the Tribunal in para graph 14 of its order thus:

“14. It was represented before us on behalf of the assessee that the sole occupation of the assessee was agricultural; that the lands purchased in the court auction were with a view to reclaim them for use as paddy fields; that the attraction in the purchase was not the standing trees but the two irrigational channels and that the standing timber had not much value at the time of purchase. It was further submitted that the present sale was the only sale of the kind made by the assessee family. In explaining the circumstances in which the clauses as to the cutting of the trees leaving the stump were introduced, it was stated by the assessee's learned counsel that it was to prevent the purchasers leaving deep holes when allowed to cut the trees with roots, that such clauses were put; that such a procedure would put the assessee to more expenses in filling the pits and reclaiming the lands for agricultural purposes. It was further represented that at the time of assessment, some 10 acres of land had been brought under paddy cultivation. It was contended that it was not a material consideration whether the assessee did it himself so long as the object was the reclaiming of the land for agricultural purposes and that in effect in either case there was sterilisation of the asset. The assessee's learned counsel sought to distinguish the case of Commissioner of Income-tax v. Venugopala Varma Raja [1968] 67 I.T.R 802 Ker... It was pointed out that the decision in that case proceeded on the interpretation of ‘clear felling’ as defined in the Madras Forests Preservation Act and-that in the assessee's case, that Act had no application and that even according to the ratio of that decision, if there was no scope for regeneration the sale proceeds of the trees could represent only capital receipt.”

5. A further contention was raised which had also been noticed by the Tribunal that some of the trees cut at least were incapable of regeneration.

6. The contention of the departmental representative was that the receipts represented the sale proceeds of trees of spontaneous growth and that various authorities had laid down that such receipts were of a revenue nature. The Tribunal came to the conclusion that the decision of this court in Commissioner of Income-tax v. Venugopala Varma Raja“is squarely applicable to this case”. It proceeded to state:

“We are not satisfied with the gloss put over these clauses by the assessee's learned counsel without any material to support it. In our opinion, the subsequent intention has also no bearing. The case of Fring-ford Estates is in point.”

7. Counsel on behalf of the assessee has strenuously challenged the conclusions reached by the Tribunal that the decision of this court in Commissioner of Income-tax v. Venugopala Varma Raja [1968] 67 I.T.R 802 Ker.. is squarely applicable and that the Fringford Estates case is in point. According to him, the principles of these decisions cannot apply to the facts that were found or admitted. His first submission was that the receipt is of a capital nature and not revenue income. He also contended that in any view of the matter it is not income. A third submission was also made that even if it was income, it was of a casual and non-recurring nature and, therefore, exempted under section 10(3) of the Income-tax Act, 1961.

8. Elaborating on the first contention, he submitted that the decision of this court in Commissioner of Income-tax v. Venugopala Varma Raja was in relation to land which was private forest governed by the Madras Preservation of Private Forests Act, 1949. The felling of the trees from such land was governed by the rules and on the facts of the case it was established that the felling was what was called “clear felling” and, on those facts, this court as well as the Supreme Court in appeal in V. Venugopala Varma Rajah v. Commissioner of Income-tax [1970] 76 I.T.R 460 S.C. came to the conclusion that the felling was of such a nature that the stumps may sprout again, that regeneration was intended as well as a further felling and a further income. He invited our attention to the conclusion reached by this court in these terms4:

“The conditions extracted above will indicate that the felling of the trees under the clear felling method will not permit a removal of the trees along with their roots. On the other hand, the clear indications are that the felling of the trees under the clear felling method should be done in such a way as to permit the regeneration and future growth of the trees concerned. In other words, what is contemplated by the clear felling method is not the sterilisation of an asset, but the removal of a growth above a particular height, leaving intact the roots and the stumps in such a manner as to ensure regeneration, future growth, further felling and a subsequent income.”

9. When the matter was taken up in appeal before the Supreme Court, their Lordships felt that the above conclusion was reached without adequate materials and therefore called for an additional statement of the case and after ascertaining the nature of the felling, their Lordships came to the same conclusion as this court did. They observed:

“On the finding in the present case it is clear that the trees were not removed with roots. The stumps of the trees were allowed to remain in the land so that the trees may regenerate. If a person sells merely leaves or fruit of the trees or even branches of the trees it would be difficult (subject to the special exemption under section 4(3)(viii) of the Income-tax Act, 1922) to hold that the realization is not of the nature of income. Where the trunks are cut so that the stumps remain intact and capable of regeneration, receipts from sale of the trunks would be in the nature of income. It is true that the tree is a part of the land. But, by selling a part of the trunk, the assessee does not necessarily realise a part of his capital. We need not consider whether in case there is a sale of the trees with the roots so that there is no possibility of regeneration, it may be said that the realisation is in the nature of capital. That question does not arise in the present case.”

10. Earlier in the judgment, their Lordships noticed several decisions of the various High Courts and stated that:

“The question whether receipts from sale of trees by an owner of the land who is not carrying on business in timber may be regarded as income liable to tax has given rise to some difference of opinion in the High Courts.”

11. And in the penultimate paragraph of the judgment their Lordships observed:

“It is not necessary for the purpose of this case to enter upon a detailed analysis of the principle underlying the decisions and to resolve the conflict.”

12. However, in a later decision in A.K.T.K.M Vishnudatta Antharjanam v. Commissioner of Agricultural Income-tax their Lordships quoted the decision in V. Venugopala Varma Rajah v. Commissioner of Income-tax and proceeded to deal with the question that was left open in the earlier decision. The facts of the case A.K.T.K.M Vishnudatta Antharjanam v. Commissioner of Agricultural Income-tax are these:

The assessee had received during the relevant accounting period for the assessment years 1963–64 and 1964–65 proceeds of the sale of teak trees which had been planted some time during 1946–47 on certain areas of her land. The trees were cut and completely removed from the land together with their roots for the purpose of planting the area with rubber. On these facts, their Lordships referred to the decision of the Privy Council in Commissioner of Income-tax v. Shaw Wallace and Co. wherein the test was laid down that “income connotes a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources. The source is not necessarily 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 mere windfall.”

13. After referring to the above test, the Supreme Court observed:

“Once the teak trees were removed together with their roots and there was no prospect of regeneration or of any production of a return therefrom, it could well be said that the source ceased to be one which could produce any income.”

14. Reference was then made to the decision of the Bombay High Court in Commissioner Of Income-Tax, Bombay South v. N.T Patwardhan. and the conclusion was reached that the receipt from the sale of the teak trees was not income. Their Lordships also referred to the contention that the assessee was prompted by profit motive in planting teak trees and in relation to this contention it was observed:

“But it was overlooked that profit motive is not decisive of the question whether a particular receipt is capital or income. An accretion to capital does not become taxable income merely because an asset is acquired in the hope that it may be sold at a profit. It must also be remembered that trees so long as they are uncut form a part of the land. If they are cut with roots once and for all a part of the assets is disposed of The sale proceeds on account of their disposal cannot constitute revenue because by removing the roots the source from which fresh growth of trees can take place is also removed. The sale of such trees thus affects capital structure and cannot give rise to a revenue receipt.”

15. It is unnecessary to refer to the numerous decisions that have been cited at the Bar for and against the propositions that have been urged before us, for we consider that the matter has now been dealt with in the above decisions by the Supreme Court. The only point that remains to be dealt with arises out of the contention of the counsel on behalf of the department that, unless the sale of the trees was with the roots and the stumps the decision in A.K.T.K.M Vishnudatta Antharjanam v. Commissioner of Agricultural Income-tax will not apply. What is contended is that by virtue of clauses 12 and 13 of the agreement, annexure “A”, it is clear that the stumps and the roots were not sold to Velappa Rowther, that he was prevented from even touching the stumps and the roots and that, therefore, we must infer that the idea was that the trees would regenerate and would produce further income. But this contention ignores other salient facts which were relied on by the assessee; that the felling of the trees and the sale thereof was with a view to convert the land into agricultural lands, that it had been so converted and it or at least some part of it had already been used for agricultural purposes at the time the assessment was made. Counsel on behalf of the assessee submitted that whenever it can be seen from the facts of a case that what was done was not to take the income by cutting and selling trees with the expectation that that income will be repeated in future after regeneration and future cutting and it was clear that the idea was to annihilate the trees once and for all and to convert the land for use for other purposes, there can be no justification for applying the principle of the decision in Venugopala Varma Rajah's case. We see force in this argument. Fringford Estates case relied by counsel for the revenue was decided, we think, on the finding that it was the business of the assessee to acquire lands and the trees, fell the trees and sell them and thus make income. The Supreme Court also understood this decision in this manner. The reference to that decision by the Supreme Court in Venugopala Varma Rajah's case is in these terms:

“The company entered into an agreement with a timber merchant for clearing a part of the forest of all trees and for sale of the trees in the market. This was held to be a part of the business activity of the company.”

16. This decision cannot, therefore, apply. It was not even remotely suggested that the assessee was engaged in the business of felling trees or had been in the business of buying lands and selling the timber on it. The facts indicate otherwise. The purchase was in the year 1905. The first sale had only been in 1960. In the letter that we have referred to, it was stated that “the present sale is the only sale and this will be the last sale”. The object of the sale was mentioned to be to convert the land for agricultural purposes. It was asserted that the land had been so converted. This fact is not disputed. It must also be mentioned that the terms in clauses 12 and 13 contained in the agreement between the assessee and the said Velappa Rowther cannot be conclusive for even if Velappa Rowther had no right to cut or remove the stumps the assessee himself could have done so. His claim that the land was intended to be converted into agricultural land and the fact that it was so converted indicated that he never expected or wanted regeneration. This cannot be characterised as a sub sequent intention. From the facts and circumstances it is clear that the stumps and the roots were intended to be removed by the assessee and were not intended to remain for the purpose of regeneration. The principle of the decision in A.K.T.K.M Vishnudatta Antharjanam v. Commissioner of Agricultural Income-tax must apply. We, therefore, answer the question in the negative, that is, in favour of the assessee and against the department. We direct the parties to bear their respective costs. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

17. Question answered in the negative.