Money from sale of teak trees held to be capital, and not as income

1. For the assessment year 1963-64 the assessee filed a return showing a net agricultural income of Rs. 12,558.76. When the matter came up for hearing before the Agricultural Income-tax- Officer another statement showing an amount of Rs. 43,250.00 as income' from teak trees was filed. The Agricultural Income-tax Officer disallowed certain expenses and assessed the income for the year 1963-64 at Rs. 62,021.00.

2. For the assessment year 1964-65 a return was filed declaring a net agricultural income of Rs. 25,733.63. No income was shown from the sale of teak trees. The Agricultural Income-tax Officer found that teak trees had been sold for a lump sum of Rs. 76,500.00 out of which Rs. 43,250.00 had been received in the previous year (1963-64) and he included the said amount in that year's income.

3. The assessee filed appeals before the Additional Appellate Assistant Commissioner who confirmed the assessment and dismissed the appeals. Further appeals were taken to the Agricultural Income-tax Tribunal.

4. The Tribunal held that the amount in dispute was agricultural income and not capital. The expenses which were claimed were also disallowed.

5. The High Court did not agree with the contention of the assessee that the amounts received by sale of the teak trees constituted capital and were not agricultural income. Certain amounts were, however, allowed as deductions by way of expenses for the assessment year 1963-64.

6. On appeal the Supreme Court held as under:

It seems to us that the well-known test laid down by the Privy Council in Commissioner of Income-tax v. Shaw Wallace and Co. [1932] 2 Comp. Cas. 276 ; 6 I.T.C. 178 ; A.I.R. 1932 P.C. 138 to find out whether a particular receipt is income is not satisfied in the facts and circumstances of the present case. According to that test, income connotes a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return excluding anything in the nature of a mere windfall. Once the teak trees were removed together with their roots and there was no prospect of regeneration or of any production of a return therefrom, it could well be said that the source ceased to be one which could produce any income. The Bombay High Court in Commissioner of Income-tax v. N.T. Patwardhan [1961] 41 ITR 313 (Bom.), said that from the point of view of a person engaging himself in the business of sale of trees the capital structure would be not only the land on which the trees stood but also the roots of the trees from which the wood yielded income. If the trees were sold off with the roots the capital structure would be affected.

The High Court in the judgment under appeal was particularly impressed with the profit motive of the assessee in planting teak trees although that was done several years ago. But it was overlooked that profit motive is not decisive of the question whether a particular receipt is capital or income. An accretion to capital does not become taxable income merely because an asset is acquired in the hope that it may be sold at a profit. It must also be remembered that trees so long as they are uncut form a part of the land. If they are cut with roots once and for all a part of the assets is disposed of. The sale proceeds on account of their disposal cannot constitute revenue because by removing the roots the source from which fresh growth of trees can take place is also removed. The sale of such trees thus affects capital structure and cannot give rise to a revenue receipt.For the reasons given above the answer to the first question will be in the affirmative and in favour of the assessee. It is unnecessary to return any answer to the second question. The appeals are accordingly allowed and the judgment of the High Court is set aside with costs.