Case: A.K.T.K.M. Vishnudatta Andharjanam represented by D.V. Nambudripad Desamangalam Vs. The Commissioner of Agricultural Income Tax, Trivandrum

1. These appeals by special leave from a judgment of the Kerala High Court arise out of the assessment of agricultural income of the assessee made under the Kerala Agricultural Income-tax Act, 1950, hereinafter called the "Act", in respect of the assessment years 1963-64 and 1964-65.      2. 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. 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 Rupees 43,250-00 had been received in the previous year (1963-64) and he included the said amount in that years income. The balance amount of Rupees 33,250-00 was received in the previous year corresponding to the assessment year 1964-65. In determining the assessable income for that year this amount was added to the income which had been returned and after disallowing certain amount which had been claimed by way of expenses the net income was determined at Rupees 61,041-00. 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. The Tribunal held that the amount in dispute was agricultural income and not capital. The expenses which were claimed were also disallowed. On an application made under Sec. 60 (1) of the Act the following two questions were referred to the High Court :"1. Whether on the facts and in the circumstances of the case, the receipt from the sale of teak trees for the purpose of planting the area with rubber is capital in nature and exempt from Agricultural Income-tax Act.      2. If the answer to the above question is in the negative, whether the expenses incurred in the prior years for the purpose of obtaining the said agricultural income is allowable as a deduction from the sale proceeds of the trees."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.

Reasoning: 5. 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.