B.L.GUPTA J. - (1.) THIS is a reference under section 66(1) of the Income-tax Act. The question which has been referred to us for opinion is : Whether from a true construction of the agreements the amounts paid under the term of the lease were expenses admissible under section 10(2)(xv) of the Indian Income-tax Act ?
(2.) THE only facts stated by the Tribunal in the statement of the case are : THE assessee is a private limited company incorporated on October 27, 1944, for carrying on the business of dealing in timber and other products of the forest and also to carry on the business of cattle breeding. It took leases of three forests known as Salwan forest, Dhak forest and Chiryapur forest. THE first two leases were executed on June 17, 1948, and the third lease on June 30, 1948. THE first lease was for a period of thirty years and the second and the third leases were for a period of six years each. THE question is whether the lease monies paid by the assessee are admissible expenditure under section 10(2)(xv). THE authorities below treated the expenditure as capital expenditure and disallowed the deduction. THE Tribunal, however, at the instance of the assessee has stated the case to us on the question mentioned above. THE Tribunal has only made annexures of the three lease deeds and its appellate order and has made no attempt whatsoever to incorporate in the statement any facts or findings. When the reference came up for hearing before this court on an earlier occasion it, by an order dated October 24, 1960, asked the Tribunal for a further statement of the case in respect of the particular amounts and the dates on which they were paid in regard to particular leases and which were claimed as admissible deductions in the two years in question. That statement has since been submitted to this court by the Tribunal and is contained in the supplementary paper book in a tabular form. It has been pointed out by this court and by other courts including the Supreme Court more than once that the statements of cases submitted by the Tribunal very often lack in necessary details regarding facts and findings. The present case is one of the worst of its kind. Here no facts or findings at all have been given in the statement of the case. The statement should have been self-contained and should have included the relevant terms as extracted by the Tribunal from the various agreements and the inferences drawn by the Tribunal from those terms. Nothing of the kind has been done. Only, as already stated above, the agreements and the appellate order have been annexed to the statement of the case leaving it to us to examine the annexures and to glean the facts and the findings ourselves from those annexures. We have done so instead of sending the case back to the Tribunal once again for a further and better statement of the case to avoid delay. We cannot, however, help expressing our firm disapproval of the slipshod manner in which the Tribunal has drawn up the statement of the case. The three leases with their dates, their period, the advance money payable under them and the amount of yearly payments may be stated in a tabular form as below : JUDGEMENT_978_ITR46_1962Html1.htm The rights and liabilities of the lessee under the three leases and which are material for the disposal of this reference may be set out leasewise follows : First lease. - The lessee shall be entitled to cut sal trees and all other kinds of trees subject to the conditions that no sal tree having a circumference of less than two feet will be cut (paragraph 7); to appropriate all kinds of produce of the jungle during the term of the lease (paragraph 8); to sublet his lessee rights on the same terms (paragraph 9); to use the existing kachha houses, thatched with grass and other houses existing on the demised premises (paragraph 10); to erect sheds thatched with grass or covered with iron sheets for purposes of the lease and for taking care of the cattle but not to construct buildings or pucca houses (paragraph 11); the main object of the lease was stated to be the improvement of cattle-breeding and the lessee was therefore to have the right to establish a cattle-breeding farm in the jungle and to use the jungle in any manner for this object (paragraph 12).
(3.) THE lessee was liable to keep the jungle safe from fire (paragraph 12); to cut the jungle on all sides within a line of 60 feet (paragraph 13); to look after the young plants which were planted after the date of the lease (paragraph 16); to pay the lease money regularly and to restore the jungle after the expiry of the term of the lease. THE lessor was entitled to shoot game in the jungle and to give leave to his friends and relatives to use the jungle similarly for that purpose and the lessee was bound to help them and not to stop them (paragraphs 14 and 15). THE lessor was also entitled to take out one garifuel from the jungle every day without paying any consideration for it. Second lease. - THE lessee will be entitled to cut all kinds of katruk trees along with shisham trees and also to cut grass and reeds and weeds and appropriate all kinds of produce of the jungle and to do grazing of cattle and scrape grass of the jungle (paragraph 6); to sublet his lessee rights on the same terms (paragraph 7). It was stated in paragraph 11 that the lessee had only taken the lease of the produce of the jungle and was to have no concern with the land within its limits which was already under cultivation or which may be cultivated thereafter and the right to collect the rent of the said land was to remain vested in the lessor. In paragraph 12 it was stated that all goods" were to be taken out of the jungle under the supervision of the servants of the lessor. THE lessee was not to have any right to utilise the jungle in any other way or for any other purpose (paragraph 13); the right to shoot in the jungle was reserved by the lessor for himself and his friends and relations as in the earlier lease and the lessee was to help the lessor in this respect. THE lessee was also to prevent poachers from stealing game from the jungle and to prevent fire or damage therein. THE lessee was also to look after young plants which already existed or were planted in the jungle after the date of the lease. Third lease. - THE lessee was to be entitled to cut every kind of tree of katruk including kher, sambhal and also grass and reed and to appropriate every kind of wild produce and was also to have the right to establish a factory for preparing kathha from kher trees and was also entitled to graze cattle (paragraph 5); the lessee could also sublet the lease on the same terms and conditions (paragraph 6); the lessee was to be entitled to take only the produce of the jungle and was to have no concern with the land which was being cultivated and the rent of which the lessor had the right to collect (paragraph 10). THE goods were to be taken out by the lessee from the jungle under the supervision of the lessors servants (paragraph 11); the lessee was not to utilise the jungle in any other way or for any other purpose (paragraph 12); the lessee was to prevent poaching and to protect young plants already planted or to be planted after the date of the lease; for the purpose of keeping intact the future produce of the jungle the lessee was to leave trees having a girth of less than 1 1/2 feet (paragraph 9); the lessor and his friends and relations were to have the right to shoot in the jungle and the lessee was bound to help them (paragraph 7). The object for which the assessee company was formed were dealing in purchase and sale of wood, fuel and produce of the jungle. The objects are fully set out in the extract from the memorandum of association of the assessee company included in the paper book. It is stated thereunder : The objects for which the company is established are to deal in all products and by-products of forests and all major and minor forest produce including vegetable extract, forest product, produce of the soil and trees of every nature and description, cattle-breeding.... and to set up and operate factories for kathha. In support of their conclusion the Tribunal relied upon the decision of the Privy Council in Kauri Timber Co. Ltd. v. Commissioner of Taxes. That was a case which went to the Privy Council from the Court of Appeal of New Zealand. In that case a company carried on the business of cutting, milling and selling timber, and for the purpose of that business it had acquired, upon its incorporation and from time to time subsequently, rights over freehold and leasehold bush lands bearing natural timber, in some cases by purchasing the lands and in other cases by purchasing the timber thereon with the right to remove the timber within a stated period. It was held by the Privy Council on those facts that, in its assessment for income-tax, the company was not entitled to make any deduction from the gross proceeds of its business in respect of the value of the standing timber which it had cut. Certain instructive principles are to be gleaned from the case. The leases there were acquired for a period of 99 years and there was no obligation upon the company immediately to cut down and remove the timber. The right to cut and remove the timber was co-extensive in time with the currency of the leases. It was observed by their Lordships that on this last ground the case was distinguishable from cases of sale of standing timber coupled with the duty of its instant removal. In view of these facts it was held that the company, under the leases, acquired an interest in lands and not merely possession of goods by a contract of sale. It was also observed that so long as the timber remained upon the land it derived its sustenance and nutriment from it. The additional growth became ipso jure the property of the company. All rights of possession in land necessary for working the business of cutting or even preserving uninjured the standing and growing stock of timber were ceded under the leases. Their Lordships went on to observe that thus not only in the eye of law but in a practical sense also an interest in land was acquired under the leases. From the point of view of accounting and finance also the cost of acquisition of possession of, and interest in, land, and of the timber rights thereon, was a capital cost and on proper accounting was not debitable against revenue. ;