The Commissioner of Income-Tax, Bihar and Orissa vs Sri Ramakrishna Deo

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 426 of 1957

Decision Date: 14 October 1958

Coram: P.B. Gajendragadkar, A.K. Sarkar, Venkatarama Aiyar, Panigrahi, Misra

The case was titled The Commissioner of Income‑Tax, Bihar and Orissa versus Sri Ramakrishna Deo and was decided on 14 October 1958 by the Supreme Court of India. The bench that delivered the judgment comprised P. B. Gajendragadkar, A. K. Sarkar and T. L. Venkatarama Aiyyar. The petitioner was the Commissioner of Income‑Tax for the Provinces of Bihar and Orissa, while the respondent was Sri Ramakrishna Deo, who owned an estate. The judgment was reported in 1959 AIR 239 and also appears in the Supreme Court Reports Supplement 1 at page 176. The case concerned provisions of the Indian Income‑Tax Act, 1922, namely sections 2(1), 4(3)(viii) and 66(1).

The respondent, who was the proprietor of a large estate, earned income from the sale of trees that grew in his forest lands. He contended that the income should be classified as agricultural income as defined in section 2(1) of the Act, and therefore it should be exempt from tax under section 4(3)(viii). The Appellate Tribunal examined the evidence and concluded that the proof showing that the estate authorities had undertaken any plantation programme was scant and unsubstantial. The Tribunal held that the trees in question were likely to have arisen by spontaneous growth and that the respondent had failed to establish the factual basis required to claim the exemption.

On a reference, the High Court took a different view. It observed that, although the trees had not been planted by the estate authorities, the authorities had carried out substantial operations for the maintenance and improvement of the forest. The High Court therefore held that the income derived from the sale of the trees qualified as agricultural income. It also decided that the burden of proving that the income was not agricultural rested on the income‑tax authorities, and it found that they had not discharged this burden, so the exemption under section 4(3)(viii) should apply.

The Supreme Court held that the High Court had erred in placing the onus on the tax authorities to demonstrate that the income was not agricultural. The Court reaffirmed the well‑settled principle that a person who claims an exemption must prove that the exemption is applicable, citing the decision in Commissioner of Income‑Tax v. Venkataswamy Naidu. The Court clarified that the question of whether the trees were of spontaneous growth or the result of plantation was a factual issue, and the finding of the Tribunal on that point was binding on the High Court under section 66(1) of the Act. Furthermore, the Court ruled that the income obtained by the respondent from selling the trees was not agricultural income because the trees had not been planted by him, and that his maintenance of a large establishment for preserving the forest was irrelevant to the nature of the income. The Court referred to the authority of Commissioner of Income‑Tax, West Bengal, Calcutta v. Raja Benoy Kumar Sahas Roy for support. The judgment was delivered in a civil appeal under the appellate jurisdiction of the Supreme Court.

No. 426 of 1957 was the appeal number filed against the judgment and order dated 21 April 1955 of the Orissa High Court at Cuttack, which arose out of Special Jurisdiction Case No. 179 of 1951. The appellant was represented by counsel consisting of A. N. Kripal, R. H. Dhebar and D. Gupta, while the respondent was represented by counsel comprising A. V. Viswanatha Sastri, M. S. K. Sastri and R. Jagannatha Rao. The appeal was heard on 14 October 1958 and the judgment of the Supreme Court was delivered by Justice Venkatarama Aiyar. The matter before the Court was an appeal from the High Court of Orissa in a reference made under section 66(1) of the Indian Income‑Tax Act, 1922 (hereinafter “the Act”). The central question for determination was whether the income that the respondent earned from the sale of trees growing in his forests qualified as agricultural income and therefore fell within the exemption provision of section 4(3)(viii) of the Act.

The respondent owned the impartible zamindari of Jaipur located in the Koraput District. The estate covered an area of approximately 12,000 square miles, of which 1,540 square miles were designated as reserve forest and 100 square miles as protected forest. From these forested lands the respondent derived revenue by selling various types of timber and forest produce, including teak, salwood, lac, myrabolam, tamarind, cashew nuts and firewood. There was no dispute as to the fact that the revenue was received, nor as to the amount of that revenue, since the respondent’s account books recorded all such receipts. The controversy therefore centered on whether such revenue was chargeable to income tax. The respondent contended that the revenue constituted agricultural income as defined in section 2(1) of the Act and, consequently, was exempt under section 4(3)(viii). By contrast, the Income‑Tax Officer, in an order dated January 1943, held that the forests had not been proven to have been planted by the respondent, that the trees were of spontaneous growth, and that the income therefore did not fall within the exemption. That order was affirmed on appeal by the Appellate Assistant Commissioner. The respondent subsequently appealed to the Appellate Tribunal, arguing that the Income‑Tax Officer had overlooked a letter from the Dewan dated 3 June 1942, which gave a detailed account of the estate’s activities in rearing and maintaining forests and, on that basis, the officer’s finding of no plantation was erroneous. The Tribunal, by its order of 9 April 1946, accepted the respondent’s contention and directed a fresh enquiry into the facts set out in the Dewan’s letter. Following that direction, the Income‑Tax Officer again investigated. He observed that, although the respondent had been afforded ample opportunity to prove that the estate had carried out plantation activities, no documentary evidence—such as plantation books or working plans for timber plantation—was produced. Consequently, the officer concluded that the forests had grown naturally and held that the income derived therefrom was assessable to tax.

When the report of the Income‑tax Officer was returned to the Tribunal, the appeal was again listed for hearing before that body. At the hearing the respondent insisted that the forests which had produced income in the year of account could not be the original virgin forests that had grown naturally on the hills. The respondent argued that those forests had been periodically stripped away by the hill tribes through a practice known as Podu cultivation. The District Gazetteer of Vishakapatnam, published in 1907, explains Podu cultivation as follows: “It consists in felling a piece of jungle, burning the felled trees and under‑growth, sowing dry grain broadcast in the ashes without any kind of tilling for two years in succession, and then abandoning the plot for another elsewhere.” According to the respondent, because of this Podu practice the original forest cover must have disappeared, and the trees that later grew and were sold as timber must have been planted by human effort. Consequently, the respondent contended that the proceeds from the sale of those trees should be treated as agricultural income rather than as ordinary income from natural growth.

The Tribunal examined the respondent’s contention and observed that, although Podu cultivation had indeed caused extensive destruction of forest in the area, substantial portions of virgin forest still remained. The Tribunal noted that the evidence presented regarding any actual cultivation or plantation undertaken by the zamindari authorities was scant and unconvincing. It further observed that no expenses relating to plantation had been shown for any period before 1904, and that the amount recorded as spent in 1904 was negligible. Accordingly, the Tribunal concluded that the trees allegedly planted in that year could not have been the same trees that were later harvested and sold as timber during the assessment years. Because the respondent was unable to establish any factual basis for claiming an exemption, the Tribunal dismissed the argument. The order of the Tribunal applied to assessments for five consecutive years, namely 1942‑43, 1943‑44, 1944‑45, 1945‑46, and 1946‑47, holding that the character of the income was the same for each of those years. On the respondent’s application, the Tribunal referred the following question to the High Court for determination: “Whether, on the facts and in the circumstances, the income derived from the forest in this case is taxable under the Indian Income‑tax Act.” The reference was heard by Chief Justice Panigrahi and Justice Misra, who answered in the negative. They observed that both parties had presented their cases in an overly exaggerated manner. The tax department’s position, they noted, was that unless the soil had been actually cultivated, the income from forest trees could not be classified as agricultural income. The fact that the assessee had incurred some expenditure and had planted valuable trees in isolated areas was not sufficient to remove the income from the extensive forests, which largely owed their existence to spontaneous growth, from the scope of taxation. The assessee’s attempt to portray the forests as containing no trees of natural origin was also deemed unsupported.

The judges noted that the forests under discussion had originated from the stumps left by hillmen who practiced the “Podu” system of shifting cultivation. They observed that the claim that the present trees were purely the result of spontaneous growth was neither precise nor correct. The judges then turned to the historical condition of the Koraput area, stating that the region had been subjected to Podu cultivation for an extended period. As a consequence of that cultivation, the original forest cover had virtually vanished by 1870. Subsequent regrowth of trees had formed new forest stands, but those too had been largely destroyed by about 1901. Accordingly, the judges concluded that no virgin forest could have survived in the area.

Next, the judges referred to the respondent’s extensive forest‑preservation establishment. They listed the organised activities carried out by the respondent, namely: (1) fostering tree growth and protecting the trees from damage by humans and cattle; (2) cultivating the soil by periodically felling and burning trees; (3) planning exploitation of trees by delineating areas into blocks; (4) systematically cutting down trees of specified girth and height; (5) planting new trees in gaps that appeared; and (6) performing watering, pruning, dibbling and digging operations from time to time. From these observations, the judges formulated their conclusion. They asserted that all of the operations undertaken by the assessee through his large forest establishment demonstrated both cultivation of the soil and the application of human skill and labour to the land and the trees. Consequently, it could not be assumed that every tree was of spontaneous growth. Instead, the evidence suggested that most of the trees were sprouts arising from burnt stumps.

The judges further rejected the Income‑Tax Department’s assumption that all the trees were forty years old and that they had arisen solely through natural, spontaneous growth. They highlighted that the present case differed from earlier reported decisions because, in practice, the entire forest area had been subjected to the Podu cultivation process for several decades, making it impossible to assert the existence of any virgin forest. Accordingly, the judges held that the onus lay with the department to prove that the income derived from the forest was taxable and fell outside the exemption provided in Section 4(3)(viii). In their view, the department had failed to establish that the proceeds from the sale of trees were not agricultural income, and they answered the reference in favour of the respondent.

Nevertheless, the judges granted the appellant a certificate under section 66(A)(2) of the Act, and the appeal consequently came before the Supreme Court. At the very outset, the Supreme Court expressed a dissenting view regarding the learned judges’ statement that the burden was

The Court observed that the burden of proving that the income sought to be taxed was not agricultural income rested on the Department. It explained that the settled rule of law requires a person who claims an exemption to establish that exemption, and there was no reason for a different approach when the exemption claimed was under the Income‑tax Act. The learned Judges had expressed the view that their conclusion was based on the principle that “where an exemption is conferred by a statute, the State must not get the tax either directly or indirectly”. They cited Lord Somervell, L.J., in Australian Mutual Provident Society v. Inland Revenue Commissioners (1) stating that the rule must be read together with the exempting provisions, which are paramount, and that any isolated interpretation of the rule that would indirectly deprive a company of its exemption must be curtailed. The Court considered that these observations did not address the question of which party bears the burden of proof. Rather, they merely set out a rule of construction requiring a reading of a rule that respects the existence of exemptions, without deciding who must prove the exemption. The Court noted that ample authority supported the proposition that the principle requiring the claimant of an exemption to establish it applies equally when the exemption is sought under the Income‑tax Act. It referred to the observations of the Lord President and of Lord Adam in Maughan v. Free Church of Scotland (1), and to Lord Hanworth, M.R., in Keren Kayemeth Le Jisroel Ltd. v. The Commissioners of Inland Revenue (2) at page 36, which held that “the right to exemption under Section 37 must be established by those who seek it. The onus therefore lies upon the Appellants”. It also cited Lord Macmillan at page 58, who said that the appellants had failed to place the matter within any exempt category and consequently had failed to demonstrate the essential element that the company was a body of persons established solely for charitable purposes. The Court further observed that Indian court decisions have consistently ruled, correctly, that those who seek exemption under section 4 of the Act must establish it, citing Amritsar Produce Exchange Ltd. In re (3) and Sm. Charusila Dassi and others, In re (4). Regarding the specific exemption under section 4(3)(viii), the Court indicated that the matter had been settled by a later decision of this Court. It referred to Commissioner of Income‑tax v. Venkataswamy Naidu (5), in which the Court held, overturning the earlier judgment, that the assessee had to prove that the income in question was agricultural income exempt under section 4(3)(viii).

In the decision of the High Court of Madras, the Court held that the burden of proof lay upon the assessee to demonstrate that the income which was the subject of assessment qualified as agricultural income and therefore was exempt from tax under section 4(3)(viii). The judgment cited several authorities, namely (1) (1803) 3 Tax Cas. 207, 21 O.; (2) (1931) 17 Tax Cas. 27; (3) [1937] 5 I.T.R. 307, 327; (4) [1946] 14 I.T.R. 362, 370; and (5) [1956] 29 I.T.R. 529, 534.

Justice Bhagwati, delivering the judgment of the Supreme Court, observed that the High Court had misformulated the issue by casting it in a negative manner and by placing upon the Income‑Tax Authorities the burden of proving that the income derived from the sale of milk received by the assessee during the relevant accounting year was not agricultural income. He explained that when a taxpayer seeks exemption on the ground that certain receipts constitute agricultural income, it is the taxpayer’s responsibility to present to the tax authorities appropriate material evidence that would lead the authorities to conclude that the receipts in question are indeed agricultural income. The tax authorities are not required to establish that the receipts are non‑agricultural. According to Justice Bhagwati, this erroneous approach to the allocation of the burden of proof vitiated the High Court’s judgment and resulted in an incorrect conclusion.

On the broader question of what constitutes agricultural income under section 2(1) of the Act, the Court referred to a recent decision, The Commissioner of Income‑Tax, West Bengal, Calcutta v. Raja Benoy Kumar Sahas Roy, reported in [1958] S.C.R. 101, 155, 158, 160. In that case, the Court held that for receipt to be classified as agricultural income, it must be shown that the income was derived from land by agriculture or by one of the operations specified in clauses (i) and (ii) of section 2(1)(b). The term “agriculture” was defined in its ordinary sense as the cultivation of the field, encompassing basic operations such as tilling, sowing of trees, plantation, and similar activities. While subsequent operations like weeding, pruning, watering, digging around the growth and removal of undergrowth may be regarded as agricultural when they are performed as a continuation of the basic operations, they cannot, in isolation, be characterized as agricultural operations. Justice Bhagwati emphasized that only when products are raised from the land through the performance of these basic operations do the subsequent operations acquire the character of agricultural operations. If the basic operations are absent, the later activities do not obtain that character. In dealing with trees that grow wild, Justice Bhagwati further noted that it is universally accepted that products which grow spontaneously on the land without any human labour or skill are not products of agriculture, and the income derived from such wild products does not constitute agricultural income.

In this case the Court first restated that products which grow wild on land without any human labour or skill are not regarded as agricultural products and the income derived from them is not agricultural income because no process of agriculture is involved in raising such products. Consequently, to determine whether the income the respondent earned from selling trees in his forests qualified as agricultural income, the essential issue was whether those trees had been planted by the estate authorities or whether they had arisen spontaneously. The Court noted that if the trees were of spontaneous growth, it would be immaterial that the respondent maintained a large establishment for preserving the forests and assisting the trees’ growth, since, in that hypothetical scenario, he would have performed no basic operations required to create the forest.

The Tribunal had explicitly found that the estate authorities had not carried out any plantation activity that could be described as a plantation, and therefore the trees that generated the assessed income must have been of spontaneous origin. The Court regarded that finding of fact as binding under section 66(1) of the Act. The learned Judges had declined to accept the Tribunal’s finding, contending that the Tribunal had failed to appreciate the true significance of Podu cultivation. The Court held that this was a misdirection. It explained that if the question for decision had been whether the forest was a virgin forest or had later sprung up, evidence concerning Podu cultivation would indeed be material. However, the actual question was whether the estate authorities had planted the forest, a matter to which Podu cultivation bore no relevance. The Court observed that the result of Podu cultivation was the disappearance of the original forests, but the remaining issue was whether the forest that subsequently regenerated was of spontaneous growth or the result of a deliberate plantation.

The Court found no evidence that, after the original forests were cleared by Podu cultivation, the estate had intervened to plant trees on the denuded area. On the contrary, the learned Judges themselves had recognized that following the destruction of the original forests, a fresh growth of forest arose from the stumps of burnt trees. The Court concluded that such regrowth was also spontaneous and not the product of any plantation activity. In fairness to the learned Judges, the Court noted that at the time they heard the reference there existed a conflict of judicial opinion regarding whether subsequent operations directed solely at the preservation and improvement of forests could be treated as agricultural operations under section 2(1) of the Act. The Judges had adopted the view that, when undertaken on a large scale as in the present case, such operations would fall within section 2(1) of the Act, and they observed that “it

In this case, the Court observed that it was pointless to treat tillage as the only and essential indicator of agricultural activity. The learned Judges had originally based their decision on the premise that, although the trees present in the forest had not been planted by the estate authorities, those authorities had carried out subsequent operations of a substantial nature for the purpose of maintaining and improving the forest. Consequently, the income derived from such activities had been classified as agricultural income. The Court held that this reasoning could no longer be sustained because of the authority established in the decision of this Court in The Commissioner of Income‑tax, West Bengal, Calcutta v. Raja Benoy Kumar Sahas Roy (1).

Counsel for the respondent argued that, according to the evidence, the correct conclusion was that the trees sold by the respondent had indeed been planted by the estate authorities. Counsel further submitted that the High Court’s finding that the income realised was covered by the exemption under section 4(3)(viii) could still be upheld even when applying the legal principle set out in The Commissioner of Income‑tax, West Bengal, Calcutta v. Raja Benoy Kumar Sahas Roy (1). The argument relied on several points: first, there was unassailable evidence that the original forests had disappeared as a result of Podu cultivation; second, the estate had consistently engaged in tree‑planting activities at least from the year 1904, as demonstrated by the zamin accounts; third, it was reasonable to infer that similar planting had taken place in the years prior to 1904 despite the absence of accounts for those years, because it would be unreasonable to expect the production of such records at the present time. Counsel also noted that the amount recorded as spent on plantation might appear modest, but this was understandable given the difficult terrain of the hills where agricultural operations were conducted, rather than the plains. On the basis of these facts, counsel contended that it was proper to conclude that the entire forest area consisted of trees resulting from plantation.

Counsel further argued that it would be a manifestly erroneous approach to require the assessee to prove, on a tree‑by‑tree basis, that each tree had been planted. The Court recognized that the issue involved an assessment of evidence pertaining to a factual question—namely, whether the trees had grown spontaneously or had been produced by plantation. The Tribunal, after reviewing all material evidence, had rendered a clear finding on this issue. The Court noted that the Tribunal’s finding was final and could not be challenged in a reference under section 66(1) of the Act. Even the learned Judges of the High Court, who claimed the liberty to review that finding, could only observe—without proper justification—that the trees must have largely regenerated from the stumps left after the forests were burned for Podu cultivation. This observation directly contradicted the respondent’s contention that the trees were the result of plantation, a point further supported by the citation (I) [1958] S.C.R. 101, 155, 158, 160. The Court concluded that the Tribunal’s determination was sound and that there were no grounds on which that finding could be attacked in the present proceedings.

The Court held that no basis existed for challenging the Tribunal’s finding in the present income‑tax assessment proceedings. It then turned to another plea raised on behalf of the respondent, which concerned the large disparity between forest maintenance outlays and the receipts generated from those forests. The records for the assessment years showed the following receipts and expenses for each financial year as detailed in the official accounts. For the year 1942‑43 the forest generated receipts of Rs 438,894 and incurred expenses of Rs 174,437 as shown in the assessment. In 1943‑44 the receipts were Rs 407,447 while the expenses amounted to Rs 209,895 according to the same financial statements. For 1944‑45 the forest earned Rs 552,122 and the maintained expenditures were Rs 228,830 as reflected in the audit record. During 1945‑46 the receipts totaled Rs 372,971 and the outlays reached Rs 247,216 as per the documented accounts for that year. In the final year 1946‑47 the revenue was Rs 689,366 while the expenditure amounted to Rs 460,369 according to the same financial statements. The respondent argued that the relatively high level of expenses compared with receipts indicated that a substantial part of the forest income derived from trees that had been planted by the estate. The respondent relied on a passage from The Commissioner of Income‑Tax, West Bengal, Calcutta v. Raja Benoy Kumar Sahas Roy (1) which noted that the maintenance expenditure was about Rs 17,000. The passage further observed that, against a total income of roughly Rs 51,000, the size of the maintenance expense was significant. Consequently, the court thought that a substantial portion of the income must have been derived from trees planted by the proprietors themselves. To understand the true meaning of those observations, it is necessary to consider the factual background in which they were made. The earlier case involved forests originally of spontaneous growth that had been gradually denuded, after which the proprietor planted trees in the cleared areas over a period exceeding one hundred fifty years. The court observed that the whole of the income derived from the forest could not be treated as non‑agricultural income (1) [1958] S.C.R. 101, 155, 158, 160. Because of that long history, the court held that the entire income derived from the forest could not be characterized as non‑agricultural income. The court also remarked that, had the inquiry been properly directed, it would have been possible for the income‑tax authorities to determine how much of the revenue was attributable to spontaneously grown forest. It added that the same inquiry could have identified the portion of income derived from trees planted by the proprietors. However, because of the extensive lapse of time, the court decided that it was not appropriate to remit the case for a fresh investigation. The respondent placed reliance on the observations made in the earlier case to support its contention that the forest income was agricultural. When these observations are considered together with the finding that the proprietor’s plantations were not negligible, they merely suggest that a substantial part of the overall income was probably agricultural. Consequently, the cited observations do not establish a rule that high maintenance expenditure automatically proves that the trees were planted by the proprietors. They merely imply that, if it is shown that a considerable portion of the forest consists of planted trees, then a substantial share of the income may be treated as agricultural.

In this case, the Court observed that only a portion of the income derived from the forest could be said to have arisen from that source. The Court further noted that such a conclusion is merely a presumption of fact, and that the persuasiveness of that presumption must be measured against the totality of the evidence on record. Given the explicit finding in the present proceedings that the forests relevant to the assessment years were of spontaneous growth, the earlier observations cited by the respondent cannot assist the respondent’s position. The Court added that the passage stating, “If the enquiry had been directed on proper lines, it would have been possible for the Income‑tax authorities to ascertain how much of the income is attributable to forest of spontaneous growth and how much to trees planted by the proprietors,” cannot be interpreted, as the respondent attempted, to place upon the Department the burden of proving that the taxed income was not agricultural income. The Court clarified that this interpretation does not reflect the true meaning of the passage, and it reaffirmed the legal principle articulated in Commissioner of Income‑tax v. Venkataswamy Naidu (1) [1956] 29 I.T.R. 529, 534. Consequently, the Court allowed the appeal, set aside the order of the lower Court, and answered the reference affirmatively. The Court ordered that the respondent shall bear the costs of the appellant both in the present Court and in the lower Court. The appeal was therefore allowed.