1960 (4) TMI 67 - HC - Income Tax

Summary

Issues Involved:
1. Nature of the receipt from the sale of trees: capital or revenue.
2. Taxability of income from the sale of trees of spontaneous growth.
3. Whether the sale of trees with roots constitutes a capital sale.
4. Ability to split the transaction into capital and income components.

Detailed Analysis:

1. Nature of the Receipt from the Sale of Trees: Capital or Revenue
The primary issue was whether the receipt from the sale of trees by roots is capital in nature and exempt from income-tax. The High Court was tasked with determining if the proceeds from the sale of trees, which were uprooted and bodily removed, should be treated as capital receipts or revenue receipts. The Tribunal had previously ruled that such income was capital in nature, as "when the tree is sold with its roots, it is clearly a capital asset which has been uprooted once and for all."

2. Taxability of Income from the Sale of Trees of Spontaneous Growth
The Department argued that the income from the sale of trees of spontaneous growth is not agricultural income and is liable to tax under the Income-tax Act. They contended that the sale of such trees should be treated as revenue income. The Tribunal, however, held that the income was capital in nature, emphasizing that the trees, when sold with their roots, constituted a diminution of the assessee's capital asset.

3. Whether the Sale of Trees with Roots Constitutes a Capital Sale
The High Court examined whether the sale of trees with their roots should be treated as a capital sale. It was noted that the assessee had sold the trees in a single year through four auctions, with a condition that the trees had to be removed with their roots. The Court agreed with the Tribunal's view that the sale of trees with roots was a capital transaction, stating that "the receipts were merely a capital accretion." The Court reasoned that the asset was the land with the wild growth of trees, and selling the trees with roots once and for all constituted a disposal of a part of the capital asset.

4. Ability to Split the Transaction into Capital and Income Components
The Department's counsel argued that even if the sale was considered a sale of trees by roots, the income representing the value of the wood should be taxable. The High Court rejected this argument, noting that the question was not raised before the Tribunal and could not be argued for the first time before the Court. The Court further stated that it is "impossible to split up the transaction into two parts and regard a part of it as capital sale and the rest as a sale producing income." The Court emphasized that if the entire land with trees had been sold, it would have been treated as a capital sale, and the same logic applied to the sale of trees with roots.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that the receipt from the sale of trees by roots is capital in nature and exempt from income-tax. The Court concluded that the sale of trees with roots constituted a capital transaction, and it was not possible to split the transaction into capital and income components. The question referred to the Court was answered in the affirmative, with the Commissioner required to pay the costs of the assessee.