Case Law Details
Flower valley Agro Tech Pvt. Ltd Vs ITO (ITAT Mumbai)
We find that certain trees lying on assessee’s land were cut since the same were obstructing the hire tension wires of the Electricity Company. For the same, the assessee was compensated for Rs.10.14 Lacs 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. Therefore, 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. Therefore, 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. In our considered opinion, 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. We order so.
FULL TEXT OF THE ITAT JUDGEMENT
1. Aforesaid appeal by assessee for Assessment Year (AY) 2015-16 contest the order of Ld. Commissioner of Income Tax (Appeals)-8 Mumbai, [in short CIT(A)], Appeal No.CIT(A)-8/IT-187/2017-18 dated 22/04/2019 on following sole ground: –
1. On the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeal has erred in confirming addition of a sum of Rs.10,14,000/- as income from other sources. The Assessee prays that such an addition be deleted as the same being Agricultural income or a capital receipt .
2. We have carefully heard the rival submissions and perused relevant material on record including the impugned order and documents placed in the paper-book. The judicial precedents as cited during the course of hearing have been deliberated upon. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs.
3.1 The material facts are that the assessee being resident corporate assessee is stated to be engaged in the business of manufacturing and trading of essential oil, plantations & extraction of essential oils. An assessment was framed u/s 143(3) on 29/12/2017 wherein returned loss of Rs.22.22 Lacs was reduced to Rs.12.08 Lacs in view of addition of Rs.10.14 Lacs under the head Income from other sources. The said sum of Rs.10.14 Lacs was received by the assessee from Assam Electricity Grid Corporation for cutting of trees on assessee’s land for heavy electric lines. The Agarwood trees weighting 4100 Kgs. as obtained from cutting of trees were sold for Rs.2.05 Lacs which has been claimed as well as accepted to be an agricultural income. The assessee pleaded that the compensation so received shall either be capital receipt not chargeable to tax or alternatively, it would be in the nature of agricultural income exempt u/s 10(1).
3.2 The Ld.AO opined that the agriculture would involve cultivation of land when the integrated activity carried on the said land comprising of basis operations followed by subsequent operations is performed. If this is done, the income so earned could be said to be the agricultural income. The trees until cut form integral part of land. The trees were cut to give way to high tension wires which were to pass through the assessee’s land. Though the trees were cut but right over the soil was retained by the assessee. Therefore, the income would not be agricultural income. The alternative plea that the same would be capital receipts was rejected by observing that standing trees would qualify as capital asset. Any compensation received in lieu thereof would be capital receipts chargeable to tax. Upon cutting of the tree, the assessee’s right there-in stood extinguished. Finally, the income so earned was held to be taxable under the head Income from other sources.
4. Before Ld. CIT(A), it was submitted that the trees grown, nursed and protected by the company since last many years was a capital asset from which regular income was derived from year to year. Cutting of tree permanently was loss of capital asset. However, Ld. CIT(A) rejected various submissions raised by the assessee and held as under: –
3.1.2 This ground of appeal pertains to addition of Rs.10,14,000/- as income from other sources. During the assessment proceedings, the AO observed that the assessee had received compensation of Rs.10,14,000/- which was shown as agricultural income. The appellant contended before the AO that the said compensation was received from Assam Electricity Grid Corporation Ltd for cutting Agarwood Trees at their Modertoli, Miktrgaon Garden and since the same was received in lieu of cutting trees ,the income from such trees is to be assessed as agricultural income u/s 10(1) of the Act The AO rejected the explanation of assessee and made addition of Rs.10,14,100/- as income from other sources.
3.1.3 During the appellate proceedings, the appellant has reiterated its explanation which was put forward by it before the AO. The appellant has also relied upon the decision of Hon’ble Apex Court in the case of CIT Bombay City vs Bumrah Trading, 1987 AIR 500, 1986 SCR (3) 269 dated 16.07.1986.
3.1.4 I have perused carefully the case law relied upon by the appellant. However, the facts of the case relied upon are entirely different from that of instant case. In the case relied upon by the appellant, the issue involved was to decide whether the compensation received was capital receipt or not, thereby taxable or not. However, in the instant case, the issue involved is whether the compensation from tree-cutting is agricultural income or not.
3.1.5 Agricultural income earned by a taxpayer in India is exempt under Section 10(1) of the Income Tax Act, 1961. Agricultural income is defined under section 2(1 A) of the Income-tax Act.
3.1.6 .As per section 2(1A), agricultural income generally means
(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
(b) Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.
(c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).
3.1.7 I find guidance on this issue in the view taken by Hon’ble Apex Court in the case of V. Venugopala Varma Rajah vs Commissioner Of Income-Tax 1970 AIR 2051, 1970 SCR (2) 547, dated 24.09.1969 wherein the Hon’ble Supreme Court has observed that It is not necessary for the purpose of this case to enter upon a detailed analysis of the principle underlying the decisions and to resolve the conflict. On the finding in the present case, it is clear that the trees were not removed with roots. The stumps of the trees were allowed to remain in the land so that the trees may regenerate. If a person sells merely leaves or fruit of the trees or even branches of the trees it would be difficult (subject to the special exemption under s. 4(3)(viii) of the Income-tax Act, 1922) to hold that the realization is not of the nature of income. Where the trunks are cut so that the stumps remain intact and capable of regeneration, receipts from sale of the trunks would be in the nature of income. It is true that the tree is a part of the land. But by selling a pan of the trunk, the assessee does not necessarily realise a part of his capital. We need not consider whether in case there is a sale of the trees with the roots so that there is no possibility of regeneration, it may be said that the realisation is in the nature of capital. That question does not arise in the present case.
3.1.8 I find that in the instant case, the trees cut were Agarwood Trees which are capable of regeneration. The objectives of the Draft Policy for Sustainable Utilisation of Agar Wood, 2014, No.-S-112013-SU issued by Ministry of Environment and Forests dated 16.01 2014 are as follow:-
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3.1.9 As per the above reproduced draft policy issued by Ministry of Environment and Forests, Agarwood trees are capable of regeneration, and Hon’ble Supreme Court in the case of V Venugopala Varma Rajah vs Commissioner Of Income-Tax 1970 (Supra), after analysing every nook and corner details on this issue, has held that if the trees are capable of regeneration, then, income from cutting of the same is to be brought to tax and it is certainly not capital in nature.
3.1.10 In view of the above, I do not find any reason to interfere with the decision of the AO on addition of Rs.10,14,0007- as income from other sources. This ground of appeal is therefore dismissed.
Aggrieved, the assessee is in further appeal before us.
5. Upon due consideration of factual matrix, we find that certain trees lying on assessee’s land were cut since the same were obstructing the hire tension wires of the Electricity Company. For the same, the assessee was compensated for Rs.10.14 Lacs 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. Therefore, 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. Therefore, 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. In our considered opinion, 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. We order so.
6. The appeal stand allowed in terms of our above order.
Order pronounced on 21st December, 2020.
