# V. VENUGOPALA VARMA RAJAH v. COMMISSIONER OF INCOME-TAX, KERALA February 13 I

- **Citation:** [1970] 2 S.C.R. 547
- **Court:** Supreme Court of India
- **Decided:** 1969-09-24
- **Case number:** Civil Appeal No. 810 of 1967
- **Bench:** J. C. Shah, V. Ramaswami, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/v-venugopala-varma-rajah-v-commissioner-of-income-tax-kerala-february-13-i-4863
- **Pages:** 7

## Headnote

Capital or Income-Contract for 'clear felling' of trees
i.e.
cutting
them so as to leave six inches of the stump to allow regeneration-Forest
of spontaneous growtlz-lncome from sale of trees so felled whether in
the nature of revenue.
cIn computing the income of the appellant's father for the assessment
year 1959-60 the Income-tax Officer included Rs. 75,000 received under
an agreement for cutting and removing trees from 500 acres of forest
land in Madras State.
The Income-tax Officer held that the income was
taxable because the land was leased for 'clear felling' by the father of the
appeJlant.
What the expression 'clear felling' meant was not investigated
by the Inc.ome-tax Officer.
The Appellate Assistant Commissioner confirmed the assessment order.
But the Tribunal held that the receipt was
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of a capital nature and deleted it from the taxable income.· In reference
the High Coun differed from the Tribunal.
In appeal against the High
Court's order this Coui"t directed the Tribunal to submit to this Court a
supplementary statement of case setting out the terms of the agreement
between the fathelr of the appe1lant relating to the rights conveyed to the
lessees and especially about the import of the term relating to 'clear felling.' The Tribunal in its supplementary statement of case set out the re1evant terms of the agreement and observed that the import of the exE
pression 'clear felling' is that 'all trees except casurina are to be felled
at a height not exceeding six inches from the grc.-und, the barks being left
intact on the stump and adhering ·to it all round the stump without being
torn off or otherwise changed."
It was not suggested that there were any
casurina trees in the forest land let out to the lessees and· it was common
ground that the trees in the forest were of spontaneous growth.
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HELD : The appeal must be dismissed.
Om the finding in the ·present case it was clear that the trees were nor
removed with roots.
The stumps of the trees were aUowed- to remain
in the land so that the trees may regenerate.
If a persorr sells merely
leaves or fruit of the trees . or even branches of the trees it would be,
difficult (subject to the special exemption under s.
4(3)(viii)
of theIncome-tax Act, 1922) to hold that the realisation is not of the nature
of income. It is true that the tree is a pan of the land. But by selling
a part of the trunk, the assessee does not necessarily rea\ise a part of
bi< capital. [553 B-C]
Commissioner of Income.tax, Madras, v. T. Manavedatr Tfrumalpad,
I.L.R. 54 Mad. 21, In re: Ram Prasad, I.L.R. 52 All. 419, Maharaja of
Kapurtha/a v. Commissioner of Income-tax,
C.P. & U.P. 13 I.T.R. 74,
Raia Bahadur Kamkshya · Nar'1in Singh
v.
Commissioner of Income-tar.
Bihar & Orissa,
14 I.T.R. 673,
Fringford Estate Ltd., Calicut v: Commissioner of Income-tax, Madras, 20 l.T.R. 285, Commissioner of lnco.metax, Bombay South v. N. T. Patwardhan, 41 I.T.R. 313,Sl\'.Zte of Kera/a
v. Karlmtharuyi Tea Estate Ltd. 51 I.T.R. 129 and Commissioner of
Income-tax, Mysore v, H. B. Van Ingen, 53 I.T.R. 681, referred to.
548
SUPREME COURT REPORTS
[1970] 2 S.C.R.
[Question whether in ca'se of sale of trees with the roots so that there
A
is no possibility of regeneration the realisation ritay be said to be in the
nature of capital, left open.] [553 Dl

## Text

A
V. VENUGOPALA VARMA RAJAH
v.
COMMISSIONER OF INCOME-TAX, KERALA
February 13 I September 24, 1969
547
B
[J. C. SHAH, V. RAMASWAMI AND A. N. GROVER, JJ.)
Capital or Income-Contract for 'clear felling' of trees
i.e.
cutting
them so as to leave six inches of the stump to allow regeneration-Forest
of spontaneous growtlz-lncome from sale of trees so felled whether in
the nature of revenue.
cIn computing the income of the appellant's father for the assessment
year 1959-60 the Income-tax Officer included Rs. 75,000 received under
an agreement for cutting and removing trees from 500 acres of forest
land in Madras State.
The Income-tax Officer held that the income was
taxable because the land was leased for 'clear felling' by the father of the
appeJlant.
What the expression 'clear felling' meant was not investigated
by the Inc.ome-tax Officer.
The Appellate Assistant Commissioner confirmed the assessment order.
But the Tribunal held that the receipt was
D
of a capital nature and deleted it from the taxable income.· In reference
the High Coun differed from the Tribunal.
In appeal against the High
Court's order this Coui"t directed the Tribunal to submit to this Court a
supplementary statement of case setting out the terms of the agreement
between the fathelr of the appe1lant relating to the rights conveyed to the
lessees and especially about the import of the term relating to 'clear felling.' The Tribunal in its supplementary statement of case set out the re1evant terms of the agreement and observed that the import of the exE
pression 'clear felling' is that 'all trees except casurina are to be felled
at a height not exceeding six inches from the grc.-und, the barks being left
intact on the stump and adhering ·to it all round the stump without being
torn off or otherwise changed."
It was not suggested that there were any
casurina trees in the forest land let out to the lessees and· it was common
ground that the trees in the forest were of spontaneous growth.
r
G
H
HELD : The appeal must be dismissed.
Om the finding in the ·present case it was clear that the trees were nor
removed with roots.
The stumps of the trees were aUowed- to remain
in the land so that the trees may regenerate.
If a persorr sells merely
leaves or fruit of the trees . or even branches of the trees it would be,
difficult (subject to the special exemption under s.
4(3)(viii)
of theIncome-tax Act, 1922) to hold that the realisation is not of the nature
of income. It is true that the tree is a pan of the land. But by selling
a part of the trunk, the assessee does not necessarily rea\ise a part of
bi< capital. [553 B-C]
Commissioner of Income.tax, Madras, v. T. Manavedatr Tfrumalpad,
I.L.R. 54 Mad. 21, In re: Ram Prasad, I.L.R. 52 All. 419, Maharaja of
Kapurtha/a v. Commissioner of Income-tax,
C.P. & U.P. 13 I.T.R. 74,
Raia Bahadur Kamkshya · Nar'1in Singh
v.
Commissioner of Income-tar.
Bihar & Orissa,
14 I.T.R. 673,
Fringford Estate Ltd., Calicut v: Commissioner of Income-tax, Madras, 20 l.T.R. 285, Commissioner of lnco.metax, Bombay South v. N. T. Patwardhan, 41 I.T.R. 313,Sl\'.Zte of Kera/a
v. Karlmtharuyi Tea Estate Ltd. 51 I.T.R. 129 and Commissioner of
Income-tax, Mysore v, H. B. Van Ingen, 53 I.T.R. 681, referred to.
548
SUPREME COURT REPORTS
[1970] 2 S.C.R.
[Question whether in ca'se of sale of trees with the roots so that there
A
is no possibility of regeneration the realisation ritay be said to be in the
nature of capital, left open.] [553 Dl
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 810 of
1967.
Appeal by special leave from the judgment and order dated
August 3, 1966 of the Kerala High Court in Income-tax Referred
B
Case No. 49 of 1965.
K. Ja,varam, for the appellant.
S. T. Desai, R. N. Sachthe)i and B. D. Sharm!J, for the respondent.
Sardar Bahadur Saharya for the Intervener.
The Judgment of the Court was delivered by
Shah, J. In computing the income of the appellant's father
-to tax for the assessment year 1959-60 the Income-tax officer
included Rs. 75,000 received under an agreement for cutting and
removing trees from 500 acres of Mangayam Katchithode forest.
The Appe!Jate Assistant Commissioner after calling for a report
-0n certain facts confirmed the order. But the Tribunal held that
the receipt was of a capital nature and deleted it from the taxable
income.
At the instance of the Commissioner of Income-tax, the Tribunal referred the following question to the High Court of Kerala :
"Whether on the facts and in the circumstances of
the
case, the Income-tax Appellate Tribunal
was
correct in holding that Rs. 75,000/- being income from
felling of trees from forests is not subject to incometax ?"
The High Court answered the question in the negative.
We are of the view that the facts found by the Tribunal are
not sufficient to enabl~ us to record an answer to the question
referred.
The Income-tax officer held that the income was taxable because 500 acres of forest land was leased for "clear felling"
by the father of the appellant and this fetched an income of
Rs. 75,000/-. What the expression "clear falling" meant was
not investigated by the Income-tax
officer.
The Appellate
Assistant Commissioner in dealing with the contention raised by
the appellant that thereceipt was of the nature of a capital,
·Observed:
"The claim is based on the reasoning that the clear felling of
forest trees amounts to sterilisation of a capital asset. In other
words clear felling is said to involve total destruction of the
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VENUGOPALA V. C.I.T. (Shah, ],)
549
forest.
It is admitted that the trees are of spontaneous growth
and it has not been established that removal of trees has in any
way affected the value of the property.
As a matter of fact, clear
felling is resorted to make the land more productive and more
valuable.
At any rate the claim has not been substantiated
beyond doubt and hence there is no scope for any relief."
The Tribunal relying upon the observation of the Income-tax
officer "that the trees were not cut together with the roots but
only 6" above the ground and that they were later on destroyed"
held that there was "nothing to show that there was a diminution
of capital assets''. On the other h1nd, the Income-tax officer had
given a clear finding that this was a case of "clear felling". After
making an extensive quotation from the Judgment of the High
Court of Bombay in Commissioner of Income-tax v. N. Putwardhan (1), the Tribunal stated that the observations applied to the
facts in the case before them, and on that account they upheld the
claim of the appellant.
The High Court observed that "it was agreed that the Mangayam Katchithode forest was within the ambit of ~e Madras
Preservation of Privat~ Forests Act, 1949, and the statutory rules
on the subject and that the expre3sion
"clear feeling" is
an
expression with a definite and specific meaning as far as such
forests are concerned".
They then proceeded to quote r. 7 framed
under the Madras Preservation of Private Forests Act, 1949, and
after setting out conditions (b) & ( c) observe<l that "the felling
of the. trees under the "clear felling" method will not penni~ a
removal of the trees along with their roots.
On the other hand,
the clear indications were that the ;felling of the trees Pnder the
the clear indications were that the felling of the trees under the
the regeneration and future growth of the trees concerned.
In
other words, what is contemplated by the clear felling method is
not 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 subsequent income." On that view the Court held that the
receipt of Rs. 75,000/- was a revenue receipt and not a capital
receipt as held by the Appellate Tribunal.
The departmental authorities. the Tribunal and the High Court
have expressed different views on the import of the exp;ession
"clear ;fe!ling" and about the true effect of the agreement.
The
Income-tax officer taxed the amount of Rs. 75,000/- on the footing that the 500 acres of forest lands were leased for clear felling.
The Appellate Assistant C01l1lllissioner held that the trees being
of spontaneous growth and the falling of the trees not having
(I) (1961]
41 I. T. R. 313.
550
SUPREME COURT REPORTS
(1970] 2 S.C.R.
affected the value of the property as a result of the clearance, the
lands became more productive and the receipt was a revenu~
income.
The Tribunal heid that the case
b.~ing one of "clear
felling" and the trees hJvin2 been cut 6" above the ground and
"that they were later on destroyed" it was a case of clear felling
and the receipt was of capital nautre.
The High Court was of
the view that the "clear felling" of forest lands meant cutting trees
and not removal of the ioot' so that there would be regeneration,
future growth, of the roots and the stumps and on that account the
receipt was of revenue naWr•?
It appears that before the Income-tax Officer the agreement
dated Sept. 11. 1957 was not produced.
After the Appellate
Assistant Commissioner remanded the case to the Income-tax
Officer the latter submitted the "remand report" and at that time
the agreement was produceJ.
The Tribunal in support of its
conclusion referred to the· preamble of the document and
the
conditions
thereof.
The learned Judges
of the High
Court
observed that they did not p!ace any reliance on the extracts in
the lease given in para.~raph 2 of the statement of the case for
coming to the conclusio~ they had reached. Why the High Court
thought it fit to discard the recitals, is not clear from the record.
The facts found being not clear, it is difficult to record any
conclusion whether the receipt was of a revenue nature or of a
capital nature.
We therefore call upon the Tribunal to submit
to this Court a supplementary statement setting out the terms of
the agreement between the father of the appellant relating to the
rights conveyed to, the lessees in the forest lands and especially
about the import of the term relating to "cleai;: felling".
The
Tribunal will submit the supplementary statement of the case only
on the basis of the evidence on the record and will not take any
additional evidence.
The report to be submitted
within
three
months from the date on which the papers reach the Tribunal.
Shah, J.
By our order dated February 13, 1969, we called
for a supplementary statement of the case setting out the terms of
the agreement conveying the rights in the forest trees to the lessees,
and the true import
of
the expression "clear felling".
The
Income-tax Appellate Tribunal has submitted a supplementary
statement ot the case.
The Tribunal has set out the relevant
terms of the agreement and has also observed that the import of
the expression "clear felling" is that "all trees except casurina are
to be felled at a height not exceeding six inchts from the ground,
the barks being left intact on the stump and adhering to it all
round the stump without being torn off or otherwise changed".
There is 'no suggestion that there were any casurina trees in
the forest lands lei out to the lessees. It is common ground also
. that the trees in the forest were of spontaneous growth.
The
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VENUGOPALA v. C.I.T. (Shah, J.)
551
Tribunal has found that by the use of the expression "clear foiling"
it was stipulated that the trees are to be cut so that 6" of the trunk
with the barks intact and adhering to it all roun.: the stump is left.
This is with a view to permit regeneration of the trees.
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.
In Commissioner of Income-tax,
Madras v. T. Manavedan Tiruma/pad, (') a Full Bench of the
Madras High Court held that the receipts ,from sale of timber
trees by the owner of unassessed forest lands in Malabar were
n:venue and not capital.
The Court observed
that if income
from the sale of coal from a coal-mine or stone won from a q·.1arry
or from the sale of paddy grown on land be regarded as income,
but for lhe special exemption granted under the Income-tax Act,
there is no logical reason for holding that income from sale of
trets is not income !iaple to tax.
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In re. Ram Prasad(') a Division Bench of the
Allahabad
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High Court held that receipt from sale of timber is income liable
to be taxed and is not a capital receipt.
The case arose under the
Government Trading Taxation Act 3 of 1926.
In Mahara;a of Kapurtha/a v. Commissioner of Income-tax,
C.P. and U.P.(') the Oudh Chief Court held that net receipt
from the sale of forest trees is income liable to income-tax, eventhough the forest may be gradually exhausted by fellings.
The
Court further observed that income from the sale of forest trees
of spontaneous growth growing on land which is assessed to land
revenue is not agricultural income within the meaning of s. 2 ( 1)
(a) of the Income-tax Act and is not exempt from income-tax
under s. 4 ( 3 )(viii) of the Act.
In Raja Bahadur Kamakshya Narain Singh v. Commissioner
of Income-tax, Bihar and Orissa(') a similar view was expressed
by the Patna High Court.
In Fringford Estates Ltd., Calicut v. Commissioner cf Incometax, Madras(') it was held that profits realised from the sale of
timber were trade profits and were liable to income-tax. In that
case the assessee Company formed with the object oJ purchasing,
clearing and improving of estates and the cultivation and sale of
tea, coffee etc. in such estates, purchased a tract ofl land part of
which had already been cultivated with tea and the rest was a
jungle capable of being cleared and made fit for plantation. The
(1) 1-L.R. 54 Mad.21.
(3) 13 l.T.R. 74.
(5) 20 l.T.R. 385.
(2) LLR.52 AIL 419.
(4).
14 1.T.R.
C73.
552
SUPREME COURT REPORTS
[1970] 2 s.c.R.
Company entered into an agreement with a timber merchant for
clearing a part of the forest of all trees and ;0r sale of the trees in
the market.
This was held to be a part of the business activity
of the Company.
The cases on the other side of the line are to be found in
Commissioner of Income.tax, Bombay South
v.
N. T. Patwardhan (1) in which a Division Bench of the Bombay High Court
held that when old trees which stood on the land of the assessee
were disposed of with their roots "once and for all", the receipts
were capital. The Court observed (p. 318) :
"The asset of the man was the land with the wild
growth of trees on it.
If the land with the trees had
been sold, there could have been no doubt that the sale
was a realisation of capital and it would not have been
possible to argue that the transaction in so far as it
involved a
sale of the trees was a sale producing
income and th.~ remaining part of the transaction was a
capital sale.
In the present case the land is retained by
the assessee but a part of the asset is disposed of in its
entirety by selling the trees with roots once and for all."
In State of Kera/a v. Karimtharuvi Tea Estate Ltd.(2)
the
Kerala High Court held in a case arising under the Kerala Agricultural Income-tax Act, 1950, that the amount realised by sale
as firewood of old and useless gravelia trees grown and maintained
in tea gardens for the purpose of affording shade to tea plants is
capital receipt and not revenue receipt.
The Court observed :
"The gravelia trees were grown and maintained fur
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 or the equipment in its
tactories.
Some of the gravelia trees became old and
useless with the efllux of time and they naturally had to
be cut down and sold.
The sale proceeds of such trees
cannot possibly amount to a revenue receipt."
In Commissioner of Income-tax,
Mysore v. H. B.
Van
lngen(') the Mvsore High Court held that the assessee who had
purchased a coffee estate of which a part had been planted with
coffee plants and the rest was jungle, and had cleared the jungle
(!) 411. T. R.
313.
(2' 51 l.T.R.
129.
(3)
53 I. T. R.
f-81.
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VENUGOPALA JI, C.I.T. (Shah, /.)
553
for the purpose of planting coffee and had sold the trees felled,
price realised by the sale of the trees was a capital and not a
revenue receipt, because the trees had grown spontaneously, and
the assessee had purchased the estate including the trees.
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.
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
speciai exemption under s. 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 pari 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.
The appeal fails and is dismissed with costs.
G.C.
Appeal dismissed.