The Judgment of the Court was delivered by
Suhas Chandra Sen, J.:— The Tribunal has referred the following question of law under section 256(1) of the Income-tax Act, 1961, to this court as follows:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 4,80,744, was neither assessable to capital gains tax nor as an item of business income?”
2. The assessee is a non-resident and is represented for the purpose of its income-tax assessment by its agents in India, M/s. James Finlay and Co. Ltd. The assessment year involved is 1969–70, the corresponding accounting period being the year ending November 30, 1968. The assessee grows, manufactures and sells tea. The Income-tax Officer computed the assessee's total income under section 143(3) of the Income-tax Act, 1961, for the assessment year 1969–70, at a loss of Rs. 9,53,497. After the Income-tax Officer completed the assessment on the assessee, it came to the notice of the Commissioner on perusal of the assessee's records, that the assessee had sold certain timber on which it had made a profit of Rs. 4,80,744. The assessee had pleaded before the Income-tax Officer that the above profit of Rs. 4,80,744 represented its agricultural income and was not liable to be included in the computation of its total income from tea business. The Commissioner held that as the sale proceeds did not represent agricultural income, the Income-tax Officer had not applied his mind to the issue and, therefore, the Commissioner considered that the order passed by the Income-tax Officer was erroneous in so far as it was prejudicial to the interests of the Revenue. The Commissioner accordingly served on the assessee a notice under section 263 of the Act for hearing. M/s. James Finlay and Co. Ltd., the assessee's agents, attended and made oral as well as written submissions. On a consideration of the submissions made by the assessee, the Commissioner formed a view that apart from the erroneous decision taken by the Income-tax Officer to treat the amount of Rs. 4,80,744 as agricultural income, it was possible to take an alternative view also to treat the surplus on the sale of timber as income under the head “Capital gains”. The Commissioner, therefore, issued a supplementary notice under section 263 of the Act and the assessee gave a written reply to this notice also. The Commissioner, after considering the oral as well as the written submissions made by the assessee and following the decision of the Supreme Court in State Of Kerala v. Karimtharuvi Tea Estate Ltd., [1966] 60 ITR 275, came to the following finding:
“Thus, I hold that the surplus so obtained on sale of such trees represents capital gains and such gains are not only Rs. 4,80,744 but also Rs. 12,868 that has been taken to the Project Account, since it is imma-terial whether such cultivated trees so felled came from wind barriers or the project area.”
3. The assessee preferred an appeal to the Tribunal. The case of the assessee before the Tribunal was—
(i) that the proceedings under section 263 initiated by the Commissioner were wholly misconceived and that the order passed in pursuance thereof was untenable in law;
(ii) that the Commissioner's finding that the surplus on sale of timber represented “Capital gains” is erroneous and so his directions to the Income-tax Officer in that regard are bad in law;
(iii) that, on the facts and in the circumstances of the case and having regard to the principles of law as laid down in judicial decisions, the Commissioner should have accepted the assessee's plea that the said surplus represented wholly agricultural income and as such was exempt for the purpose of computation of its total income.
4. The Tribunal held that the sale proceeds of the trees did not represent capital receipt. In fact, the sale proceeds represented agricultural income. The Tribunal, therefore, did not go into the question of validity of the proceedings initiated by the Commissioner of Income-tax under section 263. The Tribunal ultimately held that since the receipt was neither assessable as capital gains nor as business income, the Income-tax Officer's order was not erroneous and prejudicial to the interests of the Revenue. Whether the income received by the assessee is to be treated as agricul-tural income or not is basically a question of fact. By virtue of the provisions of section 10(1) of the Income-tax Act, the agricultural income cannot be taken into account in computing the total income of an assessee of any previous year. “Agricultural income” has been defined in section 2(1) of the Income-tax Act. Clauses (a) and (b) of sub-section (1) of section 2 are material for the purpose of this case and are as follows:—
“2. In this Act, unless the context otherwise requires,—
(1) ‘agricultural income’ means—
(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes;
(b) any income derived from such land by—
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause.”
5. The definition goes to show that not only any income derived from land by agriculture will be treated as agricultural income but any income derived from any process by a cultivator to render the produce raised or received by him fit to be taken to market will also be treated as an agricultural operation and the income therefrom will be regarded as agricultural income. The Tribunal has specifically recorded in its order the assertion of fact by the assessee that the cultivation of eucalyptus and red and blue gum trees was undertaken to provide shelter to the tea bushes and also for ensuring a continuous supply of fuel. The trees were coppiced (clear felled) after ten years so that the trees would regenerate themselves. Only those trees were cut down which had attained a par-ticular stage in their growth. By the felling of the trees, the area was neither denuded nor was it left in such a state that there would be no regeneration. The Tribunal has noted that this assertion of fact by the assessee was not contradicted by the Revenue. It has been stated by the Tribunal that they proceeded to deal with the case on the premise that the trees which were “clear felled” would regenerate themselves. There was no denudation of the area.
6. It is also to be noted that there is no dispute as to the assertion of the assessee that the trees were planted and nurtured by the assessee. The trees were not of spontaneous growth.
7. The question that has really to be decided in this case having regard to the definition of “agricultural income” given in section 2(1) of the Income-tax Act, is whether the income arising from the sale of the trees can come within the ambit of the phrase “any income derived from such land by agriculture”. It is well-settled that income from sale of forest trees of spontaneous growth will not be agricultural income. There may be some dispute where the trees are of spontaneous growth but regular operations in forest trees have taken place to help the growth of the trees. Whether the activities of nurturing trees of spontaneous growth will amount to agriculture or not will depend upon the facts of each case. But in the case before us, the trees are not of spontaneous growth. They have been planted by the assessee for the purpose of protecting the tea bushes. It cannot be doubted that agricultural operations have taken place on the land on which the trees have been planted. Basically, the land has been under cultivation for production of tea. In the case of Megh Raj v. Allah Rakhia, AIR 1942 FC 27; [1942] FCR 53, the Federal Court confirmed a decision of the Punjab Chief Court to the effect that land used as a tea garden was used for “agricultural purposes”. In fact, there is no dispute in this case that the activity relating to planting, growing and nurturing of the tea bushes will come within the ambit of the expression “agricul-tural”. The planting of trees to protect the tea bushes must be regarded as part of the agricultural activity. The purpose of the planting of the trees was to protect the tea bushes from damage that may be caused by high winds. The planting of the trees in this case was part of the agricul-tural process of growing the crop of tea. Therefore, the income derived from sale of the trees will clearly come within the ambit of the expression “any income derived from such land by agriculture”.
8. In the case of CIT v. Raja Benoy Kumar Sahas Roy, [1957] 32 ITR 466 (SC), the assessee owned an area of 6,000 acres of forest land. The forest was originally of spontaneous growth which had been in existence for about 150 years. A considerable income was derived by the assessee from sale of Sal and Piyasal trees. The question was whether the income derived from sale of timber was “agricultural income” or not within the meaning of section 4(3)(viii) of the Indian. Income-tax Act, 1922. The Tribunal had found that considerable amount of human labour and care were being applied year after year for keeping the forest alive as also reviving the portions that got denuded as a result of destruction by cattle and other causes. It was found that the assessee had employed staff for the purpose of pruning, weeding, felling, clearing and guarding the trees against pests and other destructive elements. It was also found that the assessee used to cut channels to help the flow of rain water and used to sow seeds after the digging of the soil in a denuded area.
9. The Supreme Court held in that case that, if the only finding of fact was that the forest in question was of spontaneous growth, then the conclusion would be that the income was not agricultural income. But the Tribunal had found that, in some portions of the forest area, the proprietors had planted fresh trees and had performed operations for the purpose of nursing the trees planted by them. The Supreme Court observed (at page 512): “It cannot be denied that so far as those trees are con-cerned, income derived therefrom would be agricultural income. In view of the fact that the forest is more than 150 years old, the area which had thus become denuded and replanted cannot be considered to be negli-gible. The position, therefore, is that the whole of the income derived from the forest cannot be treated as non-agricultural income”.
10. Therefore, the view of the Supreme Court appears to be that, where the trees have been planted and nurtured, the operations of planting and nurturing trees would be agricultural and the income derived from sale of such trees would be agricultural income.
11. In the case of V. Venugopala Varma Rajah v. CIT, [1970] 76 ITR 460 (SC), the Supreme Court had to consider a case of income derived from cutting and selling of trees. There it was found that the stumps of the trees were allowed to remain in the land so that the trees might regen-erate. The Supreme Court observed (at page 466): “it is true that tree is a part of the land. But by selling a part of the trunks, the assessee does not necessarily have to realise a part of his capital”. In that case, however, the dispute was whether the income was of capital or revenue nature. The Supreme Court in that case referred to the judgment of the Kerala High Court in the case of State Of Kerala v. Karimtharuvi Tea Estate Ltd., [1964] 51 ITR 129. That was a case under the Kerala Agricultural Income-tax Act. The question was whether the amount realised from sale as firewood of old and useless gravelia trees grown and maintained in the tea gardens for the purpose of affording shade to tea plants was a capital receipt or revenue receipt. There was no dispute that the income derived from sale of the trees was agricultural income. In fact, it was observed by the Kerala High Court that (at page 465 of 76 ITR), “the gravelia trees were grown and maintained for the sole purpose of providing shade to the tea bushes in the tea estates of the assessee. That such shade is essential for the proper cultivation of tea cannot be disputed and the trees should hence be considered to be as much a part of the capital assets of the company as the tea bushes themselves…”
12. If the ratio of the judgment of this case is to be applied, then the trees which have been planted to protect the tea bushes will have the same character as that of the tea bushes themselves. If income derived from the sale of tea or the tea bushes will be agricultural income, then the income derived from the sale of the trees will also be agricultural income.
13. In the case of Consolidated Coffee Estates (1943) Ltd. v. Commr. of Agrl. I.T, [1970] 76 ITR 29 (Mys), the question before the Mysore High Court was, inter alia, whether income derived from rosewood timber was agricultural income or not. The Mysore High Court held that to deter-mine the question, two tests must be satisfied:
(1) that the land must be used for growing all or any of the commercial crops; and
(2) that the income should be derived from such land by agricul-ture.
14. In that case, rosewood trees of spontaneous growth in forest area had been retained for the coffee plantation for affording shade for coffee bushes. It was held that, if the trees were of spontaneous growth, the income derived from such trees would not be income from the land by agriculture. The finding of fact in that case was that the rosewood trees were not planted by human agency or labour but those were in existence before the estates were opened and they were retained as shade trees for the coffee bushes.
15. The Mysore High Court, however, held that the shade trees were absolutely essential for the protection of coffee bushes and, therefore, the shade trees were part of the fixed assets of the planter. The proceeds of sale of timber of the shade trees were of capital nature and not taxable as income.
16. If the two tests laid down by the Mysore High Court are applied, then, in the instant case, it will be seen that the income arising out of the sale of the trees was clearly of agricultural nature. The land has been utilised for growing tea and had been subjected to agricultural operations for that purpose. The trees were not of spontaneous growth but were planted by human agency for providing shelter to the tea bushes.
17. Moreover, the planting and nurturing of the trees in the instant case cannot be treated as something apart from and independent of various agricultural activities that have taken place for producing tea. The planting and nurturing of the trees were done for protection of the tea bushes and were inextricably linked up with the process of agricultural operations undertaken for production of tea. Therefore, the income derived from the sale of the trees in the instant case will be clearly agricultural.
18. In my judgment, the amount of Rs. 4,80,744 derived from sale of timber in the instant case was agricultural income and was not assessable under the Income-tax Act, 1961. Under the circumstances, it is not necessary to express any opinion on whether the amount could be treated as capital gain or not.
19. Therefore, the question referred is answered by saying that the amount of Rs. 4,80,744 was agricultural income within the meaning of sub-section (1) of section 2 of the Income-tax Act, 1961. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.:— I agree.