2020 (12) TMI 825 - AT - Income Tax

Correct head on income - Income from trees - addition as income from other sources - Assessee prays that such an addition be deleted as the same being Agricultural income or a capital receipt - HELD THAT - Certain trees lying on assessee s land were cut since the same were obstructing the hire tension wires of the Electricity Company. Assessee was compensated during the year. We observe that the assessee was engaged in the business of manufacturing and trading of essential oil, plantations extraction of essential oils. The trees so cut by the assessee would form part of its trading operations since the assessee would be earning revenue by utilizing these trees. Had the trees not been cut, the assessee would have earned more revenue from the trees. Any compensation received in lieu of loss thereof would form part of assessee s trading operations. The same is evident from the fact that cut trees sold by the assessee constituted its trading income and the same were accepted to be agricultural income. Similar treatment was to be given to the compensation received for loss of trees. It would akin to a situation where the assessee lost its trading stock and received compensation for loss of the stock. The same would certainly be trading income for the assessee. Since, the income was earned from trees; the same would constitute agricultural income in the hands of the assessee.

Summary

Issues:
Appeal against addition of income from other sources - Whether compensation received for cutting trees is agricultural income or capital receipt.

Analysis:
The appeal contested the addition of a sum as income from other sources for the Assessment Year 2015-16. The assessee received compensation for cutting trees on their land for heavy electric lines. The dispute centered around whether the received compensation should be treated as agricultural income or a capital receipt. The Assessing Officer (AO) opined that the income earned from cutting the trees was not agricultural income as the trees were integral parts of the land, and the right over the soil was retained by the assessee. The AO concluded that any compensation received for the trees would be considered capital receipts chargeable to tax. The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the compensation was not agricultural income. The appellant argued that the trees were a capital asset from which regular income was derived and that cutting them resulted in a loss of capital asset. However, the CIT(A) dismissed these submissions, leading to the appeal before the ITAT.

The ITAT analyzed the facts and determined that the trees cut by the assessee were part of its trading operations, as it was engaged in the business of manufacturing and trading essential oils. The compensation received for the loss of trees was considered akin to losing trading stock and receiving compensation for it. Therefore, the ITAT concluded that the income earned from the trees constituted agricultural income in the hands of the assessee. The ITAT allowed the appeal, overturning the previous decisions and ordering in favor of the assessee.

In the detailed analysis, the ITAT referred to legal precedents and definitions of agricultural income under the Income Tax Act. It highlighted the importance of the nature of the trees cut, their capability of regeneration, and the commercial aspect of the assessee's operations in determining the character of the income received. The ITAT's decision emphasized the trading nature of the trees and the compensation received, ultimately categorizing it as agricultural income. The judgment provided a thorough examination of the facts, legal principles, and precedents to arrive at the conclusion that favored the assessee.