Travancore Rubbers Ltd. vs Commissioner of Income Tax

K.S. Paripoornan, J.—At the instance of the assessee-company, the Income Tax Appellate Tribunal has referred the following five questions of law for the decision of this court :

"(1) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the sale proceeds of rubber trees for which there was the basic operation of planting and subsequent maintenance is not revenue derived from land and, therefore, not agricultural income within the meaning of Section 2(1) of the Income Tax Act, 1961 ?

(2) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the sale proceeds of rubber trees is liable to capital gains without taking into consideration the assets as a whole which is a land with plantation which is not a capital asset prior to the sale of rubber trees ?

(3) Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that cost can be envisaged in respect of sale of rubber trees ?

(4) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the capital gains can be assessed u/s 45 of the Income Tax Act on transfer of rubber trees ?

(5) Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in holding that the expenses incurred by way of manuring, spraying, weeding, etc., cannot be considered as cost of improvement u/s 55 of the Income Tax Act, after holding that the assessee has incurred expenditure for raising the rubber trees and so there is cost incurred by the assessee for raising the rubber trees ?"

The respondent is the Revenue. We are concerned with the assessment year 1977-78. The previous year ended on December 31, 1976. The assessee-company is engaged in plantation business. During the relevant previous year, it sold 4,164 rubber trees for a consideration of Rs. 4,10,200. The assessing authority brought to tax the profit arising from the sale of the rubber trees as capital gains. The market value of the rubber trees was fixed as on January 1, 1954, at Rs. 14 per tree. The capital gain was fixed at Rs. 3,51,904. The Commissioner of Income Tax (Appeals) fixed the market value of the rubber trees as on" January 1, 1954, at Rs. 46 per tree. He worked out the capital gains on that basis. Before the Appellate Tribunal, the assessee as well as the Revenue filed appeals. Very many contentions were taken on behalf of the assessee and on behalf of the Revenue. This reference is only at the instance of the assessee in his appeal. I. T. A. No. 16 (Coch) of 1982. So, we are concerned only with those questions raised by the assessee before the Appellate Tribunal. The Appellate Tribunal held that the plea of the assessee that the sale of trees brought in agricultural income is without substance. It was also held that the receipt on the sale of the rubber trees is exigible to capital gains. Due to paucity of material, the Appellate Tribunal directed the Income Tax Officer to fix the market value of the rubber trees as on January 1, 1954, and recompute the capital gains thereafter. The further plea of the assessee that the cultivation expenses should be treated as cost of improvement was negatived. It is thereafter at the instance of the assessee that the questions of law, formulated herein-above, have been referred for the decision of this court.

We heard counsel for the assessee, Mr. P. G. K. Warrier, as also counsel for the Revenue, Mr, P. K. R. Menon. The sole question pressed at the time of hearing related to question No. 5. It was agreed that, in view of the order of remit by the Tribunal, no answer is called for on questions Nos. 3 and 4. Questions Nos. 1 and 2 were also not pressed.

The only surviving plea is regarding the expenditure incurred by the assessee for raising the rubber trees and the cultivation expenses, which were claimed as cost of improvement. Section 55 of the Income Tax Act deals with the cost of improvement and states that the cost of improvement means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after April 1, 1974. Having regard to the nature of the expenses incurred by the assessee, the Tribunal hold that what was claimed as cost of improvement was only cultivation expenses which cannot be called cost of improvement within the meaning of Section 55 of the Income Tax Act. We are of the view that the Appellate Tribunal was right in holding so. The expenses incurred by way of manuring, spraying, weeding, etc., are really expenses incurred in connection with the cultivation and incidental thereto. They cannot be called improvements. The Appellate Tribunal was, therefore, justified in holding that the expenses incurred in that behalf cannot be considered to be cost of improvement as envisaged by Section 55 of the Income Tax Act. We, therefore, answer question No. 5, referred to us, in the affirmative, against the assessee and in favour of the Revenue.

A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.