Holding

The clearing of the forest and sale of its produce constitute an adventure in the nature of trade and therefore attract sales tax under the Tamil Nadu General Sales Tax Act.

Summary

Shakti Estates and Shanmugha Estate, firms of ten individuals, leased reserve forest land to develop coffee and cardamom plantations. To clear the forest they felled unwanted trees and sold the resulting firewood, sized timber, sleepers and charcoal. The State of Tamil Nadu claimed the turnover from these sales was assessable under the Tamil Nadu General Sales Tax Act, 1959, while the firms argued the sales were merely incidental to plantation development and not a trade. The High Court upheld the Tribunal's view that the sales were not taxable, but the Supreme Court reversed, holding that the activities constituted an adventure in the nature of trade and fell within the definition of "business" and "dealer" under the Act. Consequently, the turnover from the forest produce was included in the assessable turnover and the assessments were modified accordingly.

Issues considered

Whether the sale of firewood, timber, sleepers and charcoal obtained by clearing a leased reserve forest for plantation purposes is assessable as "business" under the Tamil Nadu General Sales Tax Act, 1959.
Interpretation of the terms "dealer" and "adventure in the nature of trade" within the Act.

Legislation cited

Tamil Nadu General Sales Tax Act, 1959s. 2(d), s. 2(viii)(e)

Subjects

sales taxbusiness definitiondealer definitionadventure in the nature of tradeforest clearanceplantationTamil Nadu General Sales Tax Act

Judgment

STATE OF TAMIL NADU
A
v.
SHAKTI ESTATES & ANR.

FEBRUARY 1, 1989

B [SABYASACHI MUKHARJI AND S. RANGANATHAN, JJ.)

Tamil Nadu General Sales Tax Act, 1959: Section 2(d) and (g)-
Assessee-Acquiring reserve forest for coffee and cardamom plantation
unwanted trees felled-Sold as firewood, timber, sleepers and

c
charcoal-Assessee whether liable to sales tax-'Adventure in the
nature oftrade'-What is.

The respondent in each of the appeals is the assessee. It wa• a firm
1
of 10 individuals. They acquired a reserve forest, by a lease which
entitled them to enjoy the usufruct of the forest by its exploitation. The
partnership deed provided that the firm will carry on the development
D and exploitation of lands. The acquisition was effected with a view to
raise a coffee and cardamom plantation thereon. For doing this, the
assessee had to clear a portion of the forest and in the process fell the
unwanted trees standing thereon as natural growth. The cut trees were
sold by the assessee in the form of firewood as well as in the form of cut
sizes of timber as well as sleepers. Some of the growth was also con-
E verted into charcoal and the resultant charcoal sold.

The firm had been functioning for the past 7 years and bad been
paying sales tax on its sale of firewood, timber and sleepers. But for the
first time in the assessment year 1%8-69, it put forward a claim that the
above turnover was not assessable in its hands.
F
The assessing officer and the first appellate authorities held that
the turnover in question to be taxable. But the Tribunal reversed this
decision, and held that the turnover was not liable for assessment to
sales tax.

G The High Court dismissed the revision petition filed by the State.
It held that it was a case of a lease. It did not involve any sale of trees.
Merely because the trees were sawn to sizes, would not by itself make
out a sale. The suggestion that the sizing of trees into timber of their
conversion into sleepers could make a difference was not accepted by
the High Court, which following the decision of the Kerala High Court
H in Kuttiravin & Co. v. State of Kera/a, [1976) 38 STC 282 affirmed the
Tribunal's order.
408
STATE OF TAMIL NADU v. SHAKTI ESTATES 409

The State appealed to this Coon. A

Allowing the appeals and setting aside the order of the High Court
and Tribunal, the Court,

HELD: l(a) The fact that the assessees are business entities, the
B
size of the tract developed, the extent and value of the trees standing on
the land, the inevitability of the jungles having to be cleared and the
standing trees disposed of before commercial crops would be grown,
the manner in which the forest trees were disposed of, are all insignia
that mark out the entire set of activities as a concern in the nature of
trade. [4140-E]
c
I (b) In the area of income tax law, it has been held that no
adventure in the nature of trade can be spelt out where all that a person
does a mounts to a mere realisation of his capital assets. [414E-F]

l(c) The assessees in the instant case, did not merely realise the
D
value of a capital asset belonging to them. They went in for the acquisi-
tion of an asset fully realising its potentialities for exploitation not
merely as a plantation but also, incidentally, by disposing of the existing
growth on the land. [414G-H]

I (d) If one purchases an asset with a view to turn it to account in
E
such manner, one is certainly carrying out an adventure in the nature of
trade. [414H; 415A]

2(a) The definition of 'business' in the T.N. General Sales Tax
Act, 1959, includes 'any tnµ1saction in connection with or incidental

t to or ancillary' to a trade. The activities carried on by the assessee
were incidental and ancillary to the business which the assessee was
carrying on or definitely intended to carry on. It is also immaterial,
F

on this definition, that the assessee may not have had a 'motive of
making a profit or gain' on these sales, though on the facts, it is clear
that such motive must have existed and, in any event, could not be ruled
out. [415B-C]
G
2(b) Even the sales effected before the plantation started yielding
results would be covered by the definition, as the venture undertaken
by the assessee has to be considered as an integral whole and there can
be no doubt that the sale of the forest produce was part of activities in
the contemplation of the assessees right from the beginning. I416B I
H
410 SUPREME COURT REPORTS [1989] 1 S.C.R.

A Kuttiravin & Co. v. State, [1976] 38 STC 282, over ruled. L.N.
Plantation Co. v. State, [1981] 47 STC 210; Tamil Nadu Trading Co. v.
State, [1981] 52 STC 7, approved. Deputy Commissioner v. Shree
Shamungam Estates, [1979] 43 STC 226 Mad. reversed State v. Surmah
Shell, [1973] 31 STC 426; District Controller of Stores v. Assistant
Commercial Tax Officer, [1976] 37 STC 423 referred to, Deputy Com-
B missionerv. Palampadam Plantation, [1969] 24 STC 231,.distinguished.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2705
of 1977.

From the Judgment and Order dated 28.10.1975 of the Madras
High Court in Tax Case No. 492 of 1975.
c
AND

Civil Appeal No. 512(NT) of 1989.

D From the Judgment and Order dated 13.2.1978 of the Madras
High Court in Tax Case No. 332 of 1975.

R. Mohan and R.A. Perumal for the Appellant.

A.T.M. Sampath forthe Respondent In C.A. No. 2705of1977.
E
Mrs. Janaki Ramachandran for the Respondent in C.A. No. 512
(NT) of 1989.

The Judgment of the Court was delivered by
.....
F SABYASACIIl MUKHARJI, J. The question involved in these two ~
matters is the same. So we ant leave in SLP 2440 of 1979 and proceed
to dispose of both the appeals together.

The respondent assessee in each of these cases acquired a reserve
forest. It is common ground that the acquisition was effected with a
G view to raise a coffee and cardamom plantation thereon. For doing
this, the assessee had to clear a portion of the forest and in the process
fell the unwanted trees standing thereon as natural growth. The cut
trees were sold by the assessee in the form of firewood as well as in the
form of cut sizes of timber as well as sleepers. Some of the growth was
also converted into charcoal and the resultant charcoal sold. On these
H facts, the question arose in each of these cases whether the price
'i

( STATE OF TAMIL NADU v. SHAKTI ESTATES [MUKHARJI, J.} 411

realised by the assessee on the sale of firewood, timber, sleepers .and
charcoal was assessable to sales tax.
A

We are concerned with the assessment year 1969-70. The asses-
see's turnover, in respect of these items in the case of Shanmugha
Estate was Rs.3,00,396.16 which included a turnover in charcoal of.
Rs.86,829.24. In the case of Shakti Estate, the disclosed turnover was B
k as follows:

Firewood 1,98,687.08
Sized timber 83,490.89
Sleepers 28.164.00

3. l!U47 97 c
....
The Deputy Commercial Tax Officer added 5% towards omissions and
assessed a turnoverofRs.3,25,859.07.

The further facts disclosed in the case of Shakti Estate are these. D
The assessee is a firm of 10 individuals. It had not purchased the forest
but had got a lease which entitled them to enjoy the usufruct of the
forest by its exploitation. Clause (4) of the partnership deed recites
that "the firm will carry on the development and exploitation of the
"' lands". The firm had been functioning for the past 7 years and had
been paying sales tax on its sales of firewood, timber and sleepers. But
for the first time in assessment year 1968-69, it put forward a claim that
E

the above turnover was not assessable in its hands. The full facts in the
case of Shanmugha Estate are not on record but, except for the fact
that this was a case of a purchase of a forest by the assessee, and that
t the plantation does not seem to have started yielding crops, the facts
are broadly similar to those tn the case of Shakti Estate. The assessing F
officers and the first appellate authorities held the turnover in question
to be taxable. But the Tribunal reversed this and held that the
turnover was not liable for assessment to sales tax.

The High Court had dismissed the revision filed by the State in
the case of Shakti Estate in respect of assessment year 1968-69 by a G
..l short order which read:

"We are of the view that the Tribunal was right in its order.
This was a case of a lease. It did not involve any sale of
trees. Merely because the trees cut were sawn to sizes, that
would not by itself make out a sale." H
412 SUPREME COURT REPORTS [1989] I S.C.R.

In respect of assessment year 1969-70 also, the State's revision was
A
dismissed following the above order. In the case of Shanmugha Estate
the department challenged the Tribunal's finding only in respect of
sales of sized timber. The suggestion that the sizing of trees into timber
or their conversion into sleepers would make a difference was not
accepted by High Court, which, following the decision of the Kerala
B High Court in Kuttirayin & Co. v. State, [1976] 38 STC 282, affirmed
the Tribunal's order by its judgment reported in (1979) 43 STC 226. The
State appeals from the judgments in both the cases.

The answer to the question posed depends on the interpretation
of the expressions "dealer" and "business", as defined under the
Tamil Nadu General Sales Tax Act. These definitions read thus:
c
''Business includes:

(i) any trade, or commerce or manufacture or any adven-
ture or concern in the nature of trade, commerce or
D manufacture whether or not such trade, commerce, manu-
facture, adventure or concern is carried on with a motive to
make gain or profit and whether or not any profit accrues
from such trade, commerce, manufacture, adventure or
concern; and

E (ii) any transaction in connection with, or incidental to
ancillary to such trade, commerce, manufacture, adventure
or concern."

"Dealer means:

F any person who carries on the business of buying, selling,
supplying or distributing goods, directly or otherwise,
whether for cash or for deferred payment, or for commis-
sion, remuneration or other valuable consideration and
includes-

G (i) a local authority, company or Hindu undivided family,
firm or other association of persons which carries on such
business;

(ii) a casual trader ............ "

H It is seen that, in the case of Shakti Estate, the plantation has
STATE OF TAMIL NADU v. SHAKTI ESTATES [MUKHARJI, J.J 413

~ .... the extent of Rs.58,000 while it is stated that the Shanmugha Estate
started functioning and there is turnover in coffee and cardamom to
A
' has not yet started deriving income from its plantation. The principal
contention of the assessees is that they are, or may, no doubt, become,
dealers in coffee or cadamom or other crops grown, or to be grown, on
the estates but that they are by no means dealers in firewood, timber,
;Jeepers or charcoal. They say that their intention in acquiring the B
~ forest or rights therein was not to deal in the forest produce-whether

~·
as firewood, timber, charcoal or otherwise-but to start a plantation
thereon. That business could not be started or carried on without
clearing the forest trees and so the activity of clearing the jungle was
one that was not only unconnected with the assessees' business as such
but was something the assessees were constrained to indulge in. This
amounted to nothing more than a mere realisation by an owner of a
c
..... part of his property to the best advantage and cannot be described as a
trading activity or as partaking of the character of an adventure or
concern in the nature of trade.

We do not, however, think that the above contention of the D
assessees can be accepted. The facts show that each of the assessees
has acquired a huge forest area which contains a large number of trees.
When the asseessee purchased the forest or got it on lease for starting
a plantation thereon, it was aware of the existence of trees (some of
+- them quite valuable) on the land and the price paid must inevitably
have included some value for these trees as well. The assessees also E
knew full well that before they could start the plantation, as well as
during the running of it, they would have to clear the forest in stages
by cutting off the trees standing thereon and disposing of the same
from time to time. Each of these assessees is a firm the purpose of
1- which is to carry on business. It will be quite proper and natural to
infer that the intention of the assessees at the time of purchase inclu- F
ded not only an intention to grow and sell coffee and cardamom and
other crops but also an intention to dis~;ise of the trees standing on the
land to the best advantage ih the circumstances. Indeed the lease deed
in the case of Shakti Estate clearly talks of an intention of "develop-
ment and exploitation of the lands", words'which cannot be merely
confined to the cultivation of commercial crops thereon. In the face of G
such a declared purpos<;, it is of no relevance whether the exploitation
-~ and development was under the terms of a lease deed or a purchase
deed and the distinction made by the High Court between the two
would appear immaterial. The extent of the lands acquired or leased
out is so vast that the clearance has to be done in stages and the sale of
forest trees extends over several years. Indeed, it is bound to be a H
414 SUPREME COURT REPORTS [1989] 1 S.C.R.

A recurring feature even after the plantation starts working as there will ( +,-
always be a certain number of trees retained in the plantation as shade
trees and the like. The nature of the task undertaken by the assessee is
really one in the nature of a venture to carry out sustained, systematic
and organised activities in the nature of business. These activities do
not merely cover the running of a plantation. They commence right
B from the beginning when the assessee went in for the land with a view
to developing it. They fully intended, as a first stage in the business
which they intended to start, to exploit the trees standing on the land
to the maximum advantage. Moreover, they did not merely sell the
forest trees haphazardly. They took steps to exploit them in a commer-
cial manner. When the trees yielded timber, the assessee not only had
them sawn and cut to sizes but even converted them into sleepers and
C sold them. They reduced a part of the jungle growth to charcoal and
sold the same. Taken all together, one is left in no doubt that when the
assessees went in for a purchase or lease of the forest for starting a
plantation they also knowingly let themselves in for engaging in a trade
in the forest produce. The fact that the assessees are business entities,
D the size of the tract developed, the extent and value of the trees stand-
ing on the land, the inevitability of the jungles having to be cleared and
the standing trees disposed of before commercial crops could be
grown, the manner in which the forest trees were disposed of are all,
we think, insignia that mark out the entire set of activities as a concern
in the nature of trade.
E
It is true that, in the area of income tax law, it has been held that
no adventure in the nature of trade can be spelt out where all that a
person does amounts to a mere realisation of his capital assets. It has
been held thus that an owner of a huge estate who does not want to
retain it any longer cannot be taxed on the surplus accruing to him on
F the sale of his capital assets even though he might carry out the realisa-
tion to best advantage in a commercial manner such as by forming a
company, developing the lands, plotting them out, advertising them
for sale, waiting for a favourable market and selling them over a
. ~period of several years. But this line of cases is of no help in the
,.,-.--- \context of the facts of the present case and in the view we have taken
1 •above of the assessees' transactions. Here the assessees did not merely
\ .r realise the value of a capital asset belonging to them. They went in for
\the acquisition of an asset fully realising its potentialities for exploita-
1 tion not merely as a plantation but also, incidentally, by disposing of
; the existing growth on the land. It seems impossible to say that they
did not int.end to do this also while going in for the acquisition. If one
purchases an asset with a view to turn it to account in such manner, we
' '
./
, ,
STATE OF TAMIL NADU v. SHAKTI ESTATES [MUKHARJJ, J.] 415

-J,. think, one is certainly carrying out an adventure in the nature of trade.,
A
Moreover, we have also to give full effect to the definitions in the
statute we are concerned with. The definition of a "business" also
includes "any transaction in connection with or incidental to or ancil-
lary" to a trade and thus, even on the assessees' own arguments, these
~ activities were incidental and ancillary to the business which the asses- B
see was carrying on or definitely intended to carry on. It is also
immaterial, on this definition, that the assessees may not have had a
"motive of r.iaking a profit or gain" on these sales though on the facts,
. it is clear that such motive must have existed and, in any event' could
not be ruled out. The reference to a "casual" dealer in the second
definition also renders it immaterial that the assessees may not have
intended to be regular dealers in sleepers, timber, firewood or c
..,._ charcoal but that this was something casual or incidental to the acquisi-
tion and exploitation of a forest for running a plantation.

Before concluding, we may refer to the decisions cited before us.
The decisions of the High Court in the present cases and in Kuttirayiti's D
case (supra) support the assesses' contention but, for reasons given
above, we are unable to accept them as correct. The decision of the
Madras High Court in L.N. Plantation Co. v. State, 11981] 47 STC 210
~ supports the department's contention and we approve of the same. In
Tamil Nadu Trading Co. v. State, 11981] 52 STC 7 the Madras High
Court was dealing with a case where the assessee was found to be a E
dealer in timber. But, in the course of their judgment, the Court made
the following observations which support the case of the department:

· "Even if it were to be assumed, without accepting, for the

t sake of argument, that the assessee purchased the land for
the purpose of coffee plantation, the sale of timber and
firewood fall under "any transaction" in connection with or
F

incidental or ancillary to the business of coffee plantation
and would threfore, fall within the definition of "business"
under s. 2(d) of the Act."

We agree. G

There decisions of this Court were also referred to by counsel.
State v. Burmah Shell, 11973] 31. STC 426 and District Controller of
Stores v. Assistant Commercial Tax Officer, 11976] 37 STC 423. were.
cases. w!)ere an assessee, carrying on a business, had· to. dispose of:
unserviceable or useless material and such disposals.were held, taxable
416 SUPREME COURT REPORTS 119891 1 S.C.R.

A as "business" sales, the transactions being incidental or ancillary to the
principal business carried on by the assessee. The disposals effected by
the Shakti Estate whose plantation business had started in full swing
will certainly fall squarely within the principle of these decisions. But,
as we have discussed above, in our view, even the sales effected before
B the plantation started yielding results would be covered by the defini-
tions as the venture undertaken by the assessee has to be considered as
an integral whole and there can be no doubt that the sale of the forest
produce was part of the activities in the contemplation of the assessees
right from the beginning.

As against the above decisions, reliance was placed, on behalf of
C the assessees, on Deputy Commissioner v. Palampadam Plantation,
I 1969] 24 STC 231 where, it is said, it was held that an assessee could
not be held taxable as a dealer on the sale of trees of spontaneous ~
growth in a plantation. But that decision dearly turned on the specific
language of the definition of "dealer" contained ins. 2(viii)(e) of the
Kerala General Sales Tax Act, 1963, and does not lay down any
0
general proposition as contended for on behalf of the assessees.

For the reasons discussed above, we allow the appeals and set
aside the order of the High Court and tribunal in these cases. In the
result, the turnovers in dispute in the two cases before the High Court +
E will stand included in the assessees' turnover and the assessments
modified accordingly. We, however, make no order regarding costs.

N.V.K. Appeals allowed .

•

.k