2011 (11) TMI 493 - AT - Income Tax

Determination of nature of charges/compensation received - rent fixed between the parties, compensation paid for carrying out changes in the area, its topographgy, terraces, fields, etc. and also to cut/remove all fruit trees - compensation was shown as agricultural income in the original return by assessee and then as capital receipt not chargeable to tax in revised return Revenue deeming it be income from other sources Held that - The standing trees are capital assets as it constitute property of any kind as defined under section 2(14) of the Act. The said capital asset has been transferred by way of the transaction entered into by the assessee with the lessee under which Transfer rights of the assessee in the said asset stand extinguished as the parties entered into agreement for cutting and removing the same from the land in question. The profits arising on such transfer of the capital asset by the assessee is chargeable to tax as income from capital gains in the hands of the assessee as decided in Travancore Tea Estates Co. Ltd vs CIT, Kerala (1973 (2) TMI 21 - KERALA HIGH COURT). Moreover, the Assessing Officer has erred in treating the income as income from other sources by merely disbelieving the evidence produced by the assessee, and without bringing on record any clinching evidence to the contrary. Therefore, orders of the CIT(A) are set aside Assessing Officer is directed to compute the income under the head income from capital gains . - Decided partly in favor of Revenue.

Issues Involved:

1. Classification of compensation received for cutting/removal of apple trees and changes in land topography.
2. Determination of whether the compensation is a capital receipt or revenue receipt.
3. Assessment of the compensation under the appropriate head of income for tax purposes.

Issue-wise Detailed Analysis:

1. Classification of Compensation Received:

The core issue revolves around the classification of the compensation amounting to Rs. 67,46,129/- received by the assessee for the removal of apple trees and changes in the topography of the land. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had differing views on whether this compensation should be considered a capital receipt or revenue receipt.

2. Determination of Whether the Compensation is a Capital Receipt or Revenue Receipt:

The AO argued that the compensation was for non-agricultural activities and should be treated as "income from other sources." The AO contended that the land was classified as 'banjar' (wasteland) and no evidence was provided to show the presence of fruit-bearing trees. Consequently, the AO assessed the compensation as income from other sources, rejecting the claim that it was a capital receipt for the loss of capital assets.

Conversely, the CIT(A) held that the compensation was for the loss of income-generating apple trees, which were considered capital assets under section 2(14) of the Income Tax Act. The CIT(A) relied on precedents, including the Supreme Court's decisions in CIT v. Shamsher Printing Press and Senairam Doongarmall v. CIT, to support the view that compensation for the loss of a capital asset is a capital receipt and not chargeable to tax.

3. Assessment of the Compensation Under the Appropriate Head of Income for Tax Purposes:

The Tribunal examined the nature of the compensation and the definition of capital assets under section 2(14) of the Income Tax Act. It was noted that standing trees are considered capital assets as they constitute "property of any kind." The Tribunal referenced the Kerala High Court's decision in Travancore Tea Estates Co. Ltd. v. CIT, which held that standing trees on agricultural land are capital assets and profits from their sale are assessable under section 45 as capital gains.

The Tribunal further noted that the compensation was paid for the removal of trees and changes in the land's topography, which constituted a transfer of capital assets. Therefore, the profits arising from this transfer should be taxed as capital gains. The Tribunal directed the AO to compute the income under the head "income from capital gains" and not as "income from other sources."

Conclusion:

The Tribunal concluded that the compensation received for the removal of apple trees and changes in land topography is a capital receipt. The compensation should be assessed under the head "income from capital gains" as it arises from the transfer of capital assets. The Tribunal set aside the CIT(A)'s order and directed the AO to reassess the income after allowing a reasonable opportunity to the assessee. The appeals of the Revenue were partly allowed, and similar directions were issued for other captioned appeals, restoring them to the AO for adjudication based on the Tribunal's findings.

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