Commissioner of Income Tax vs Midland Rubber and Produce Co. Ltd.

Paripoornan, J.—These two references are connected ones. IT Reference No. 315 of 1985 is at the instance of the revenue and IT Reference No. 316 of 1985 is at the instance of the assessee. Both the references arise out of the common order passed by the Tribunal dated 29-6-1984 for the assessment year 1977-78. For the said year, there were two appeals before the Tribunal-one was at the instance of the assessee and the other at the instance of the revenue. From the common order passed in the said two appeals dated 29-6-1984, the revenue as well as the assessee got referred the following questions of law for the decision of this Court :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no capital gains arose to the assessee by the sale of 2,749 old rubber trees from the rubber estate of the assessee ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no tax on capital gains was attracted in respect of the trees standing on a rubber estate sold by the assessee ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the rubber replantation subsidy received by the assessee is not liable to be included in the income of the assessee ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to claim deduction of the surtax payable under the Companies (Profits) Surtax Act, 1964 in computing the business profits of the assessee ?"

The first three questions are at the instance of the revenue and the fourth question is at the instance of the assessee.

We heard the counsel. The assessee is a plantation company. During the relevant assessment year 1977-78 for which the previous year ended on 31-3-1977, the assessee sold rubber trees from its estate. Besides the above, the assessee also sold 10.59 acres of rubber estate. The assessee also received Rs. 50,117 as rubber plantation subsidy. In the assessment, the assessee put forward a claim of deduction of the surtax payable by it for the relevant accounting period. In the final order passed by the Tribunal, the Tribunal held that, with regard to the sale of the rubber trees, no capital gains arose out of the transactions, since the fair market value of the trees sold during the relevant accounting period ended with 31-3-1977, should be far lesser than the market value of such trees as they existed on 1-1-1954, and, in this view, no capital gains tax is exigible on the sale of old and unyielding rubber trees. The Tribunal also held that in a case where the rubber estate was sold with trees, there can be no assessment of capital gains attributable to the sale of the trees. The rubber replantation subsidy was held to be not a revenue receipt. While holding these three points (questions) in favour of the assessee, the Tribunal held that the surtax payable by the assessee cannot be allowed as a deduction in computing the business profits of the assessee. It is from the above order of the Tribunal deciding the first three questions against the revenue that the revenue has got them referred to this Court. It is the fourth question, which was decided against the assessee, that the assessee has got referred for the decision of this Court.

We heard the counsel. We will deal first with the three questions referred at the instance of the revenue. The first question is whether capital gains arose to the assessee by the sale of old rubber trees from its estate. The Tribunal held that the fair market value of the trees as on 1-1-1954 would be much more than its value when sold later as old and unyielding trees. We had occasion to examine this question in a series of cases. A Bench of this Court in Kanthimathy Plantations Pvt. Ltd. Vs. Commissioner of Income Tax, by judgment dated 22-8-1989, held that no capital gains can be assessed on the sale of old and unyielding rubber trees during the assessment years 1975-76 to 1978-79, since the fair market value of those trees as on 1-1-1954, or as on 1-1-1964, as the case may be, would have been far higher, since the trees would be yielding trees then. In a series of subsequent cases also this Court has taken the same view. We hold that judicial notice can be taken of the fact that a yielding rubber tree as on 1-1-1954, or as on 1-1-1964, when sold later as an unyielding and worn out tree, will be far less in value and no capital gains can arise on the said transaction. In this view, we answer question No. 1 in the affirmative, against the revenue and in favour of the assessee. In a case where the assessee has sold the rubber estate with trees, this Court has held that no tax on capital gains can be levied with regard to the capital gains notionally calculated in respect of the trees standing on the rubber estate. This has been held so by a Bench of this Court in CIT v. Alanickal Co. Ltd. [1986] 158 ITR 6302. In this view, we answer question No. 2 in the affirmative, against the revenue and in favour of the assessee.

A Full Bench of this Court in CIT v. Ruby Rubber Works Ltd [1989] 178 ITR 1813 has held that rubber replantation subsidy received by a planter is not liable to be included in the taxable income. It is not a revenue receipt. In the light of the Full Bench decision, we answer question No. 3, referred to us at the instance of the revenue, in the affirmative, against the revenue and in favour of the assessee.

Next, we are concerned with the fourth and the last question referred to us at the instance of the assessee. The only aspect that arises therein is whether the assessee is entitled to deduction of the surtax payable under the Companies (Profits) Surtax Act, 1964 in computing the business profit of the company. This has been held to be not a permissible deduction by a Full Bench of this Court in A.V. Thomas and Co. Ltd. Vs. Commissioner of Income Tax, . In the light of the Full Bench decision of this Court, we hold that the assessee is not entitled to claim deduction of the surtax payable under the Surtax Act in computing the business profit of the company. We answer this question in the (Affirmative) against the assessee and in favour of the revenue. The two references are answered as above.