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Whether sale of trees is agricultural income
Mon, 09 May 2011
Whether sale of trees is agricultural income

QUESTION: During the current financial year, I have sold trees from my land which is situated beyond municipal limits for a total value of Rs.25 lakh. Part of the trees was grown without any aid. Besides these receipts, I have income from business, which is subject to audit under Sec. 44AB. I am advised that I have to pay tax on the income from the sale proceeds of trees grown without aid as income from long-term capital gains, the other portion being exempt as agricultural income. For the portion of income to be treated as long-term capital gains only the expenditure incurred on sale is admissible. I am also advised to include the income liable for capital gains for purposes of payment of advance tax. Since I have not maintained any accounts for the maintenance of land, namely, salary for watchman, irrigation expenses for a portion of trees which include installation of motor pump and electricity charges, am I not entitled to claim these in computing the income to be taxed under capital gains or agricultural income? Kindly advise whether I can get any tax exemption on the sale proceeds of trees.

ANSWER: The advice that sale proceeds should be split up as between those trees which were grown without aid and those trees which were grown by him is based on the classification in respect of sale proceeds of spontaneous growth in a forest area which had been held to be non-agricultural income following the decision in Raja Mustafa Ali Khan v CIT (1948) 16 ITR 330 (PC). This decision could have no application where regular operations are carried even in respect of forest trees as decided in Vikram Deo Varma, Maharaja of Jeypore v CIT (1956) 29 ITR 76 (Ori). Merely because some trees were already there in the reader's farm, without his having grown them, such trees are no different from other trees in the farm.

Some trees like shade trees as for coffee plantation or trees used for horticulture or rubber trees used for slaughter tapping may be capital assets because they are grown for their yield of agricultural income so that they retain the character of capital assets irrespective of the fact that whether such trees were grown by them or not as decided in State of Kerala v Karimtharuvi Tea Estate Ltd. (1966) 60 ITR 275 (SC). But all trees need not be capital assets where trees are grown for timber as in the case of a casuarina plantation, where such trees are cut and sold. Income therefrom will have the character of agricultural income. In fact, there is a difference between trees cut along with the roots and trees which have a stump after cutting for re-generation. It is only in the former case, it could be a capital receipt and in the latter instance of sale of trunks, it could well be an instance of agricultural income as decided in A. K. T. K. M. Vishnudatta Anthrajanam v C. Ag. I.T.(1970) 78 ITR 58 (SC).

Even assuming that the trees that are sold have been cut along with the roots without any scope for re-generation, there is no reason why such income from trees should not be treated as agricultural income, because the Supreme Court in Navinchandra Mafatlal v CIT (1954) 26 ITR 758 (SC) has decided that capital gains is also a species of income. It follows that there is no reason why agricultural capital gains should not be exempt as agricultural income under the definition of agricultural income under Sec. 10(1) of the Income-tax Act in a wider sense than what is understood under Sec. 2(1A) of the Income-tax Act.

In fact, agricultural land is understood in a wider sense for wealth tax purposes except where such income is deemed as urban land because of its location in the town with a population exceeding 10,000 or it is in a notified periphery. It may be noted that there is also a constitutional limitation for taxing agricultural income.

From the above discussion, it follows that if the tree trunks are cut and sold with stumps intact with scope for re-generation, the receipt would be agricultural income. If not, it could be sale of capital asset. But as yet, there is no direct decision from the apex court as to their liability for capital gains tax. However, the Supreme Court in Kalpetta Estates Ltd. v CIT (1996) 221 ITR 601 (SC) held that the receipt from the sale of old rubber trees, admittedly capital assets, would not be taxable since the cost of growing and maintaining them may well exceed the sale price. Such cost would ordinarily form part of current revenue expenditure so that this inference may be questioned with reference to facts in other cases. In fact, the High Court in Emerald Valley Estates Ltd. v CIT (1996) 222 ITR 799 (Kar) found that in the absence of extent of capital expenditure on them, there could be liability for capital gains. But the High Court did not have the benefit of the decision in Kalpetta Estates' case (supra). But in both cases, the argument that agricultural capital gains are also agricultural income, so as to be exempt, was not taken.

But there is an alternative argument as was found in CIT v Suman Tea and Plywood Industries Pvt. Ltd. (1997) 226 ITR 34 (Cal), where it was held that there could be no capital gains on sale of tea bushes as no capital cost was incurred on them so that such sale without any cost should avoid capital gains following the rationale of the decision in CIT v B.C. Srinivasa Setty (1981) 128 ITR 294 (SC). It may be seen from the available precedents that there is a case for a claim for non-liability on sale of trees in the facts of the reader's case.

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