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Issues Involved:
1. Whether the receipts from the sale of forest trees were income or capital. 2. Whether the income from the sale of forest trees constitutes agricultural income under Section 2(1)(a) of the Income-tax Act and is exempt from income-tax under Section 4(3)(viii) of the Act. Issue-wise Detailed Analysis: 1. Whether the receipts from the sale of forest trees were income or capital: The Tribunal and the Court examined whether the receipts from the sale of forest trees should be considered as income or capital. The assessee argued that the receipts were capital converted into cash and not taxable. The Tribunal, however, found that the forest land was granted without any condition to clear the jungle or bring the land under cultivation. The forest had been worked for profit, with substantial amounts expended on its maintenance, and regular income derived from it. The Tribunal referred to the case of Kauri Timber Co., Ltd. v. The Commissioner of Taxes, which established that the cost of acquiring land with timber growing on it is not debitable to revenue account. The Tribunal concluded that receipts from the sale of timber growing on land are taxable under income-tax statutes, aligning with the principle that income from the sale of timber is akin to income from the extraction of minerals from the soil. The Court upheld this view, emphasizing that the gradual extinction of capital in the process of realization could still be considered income. The Court cited multiple cases, including the Privy Council case in Kamakshya Narain Singh v. Income-tax Commissioner, Bihar and Orissa, to support the principle that receipts from capital exhausted in realization may still be taxable as income. The Court concluded that the receipts from the sale of forest trees were liable to income-tax. 2. Whether the income from the sale of forest trees constitutes agricultural income under Section 2(1)(a) of the Income-tax Act and is exempt from income-tax under Section 4(3)(viii) of the Act: The Tribunal and the Court examined whether the income from the sale of forest trees could be classified as agricultural income. The definition of "agricultural income" under Section 2(1)(a) requires that the income must be derived from land used for agricultural purposes and assessed to land revenue. The Tribunal found that the land was assessed to land revenue but held that the income from the sale of forest trees did not meet the second condition of being derived from land used for agricultural purposes. The Tribunal noted that forestry or sylviculture is not included in the term agriculture, and agriculture implies the cultivation of the soil. Since the forest was a spontaneous growth and not the result of any agricultural operations, the income could not be considered agricultural income. The Court agreed with this view, emphasizing that the term "land used for agricultural purposes" does not extend to forests of spontaneous growth where no tillage or preparation of the soil for planting trees occurs. The Court cited various cases, including Kesho Prasad Singh v. Sheo Pragash Ojha and Province of Bihar v. Pratap Udai Nath Sahi Deo, to support the conclusion that income from jungles or jungle land is not agricultural income. The Court held that the income from the sale of forest trees of spontaneous growth growing on land assessed to land revenue is not agricultural income within the meaning of Section 2(1)(a) of the Income-tax Act and is not exempt from income-tax under Section 4(3)(viii) of the Act. Conclusion: The Court concluded that the receipts from the sale of forest trees were liable to income-tax and that the income from the sale of forest trees of spontaneous growth did not constitute agricultural income exempt from income-tax. The assessee was ordered to pay the costs of the reference, with the fee of the learned counsel for the income-tax department fixed at Rs. 200.
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