The respondent(assessee) owns a 6,000-acre forest land with Sal and Piyasal trees and getting considerable income from selling those trees.
The forest has been in existence for about 150 years, originally of spontaneous growth.
The forest income was last taxed in 1923-24 but was not taxed until 1944-45.
Upon reassessment, the Income Tax Officer added a sum to the assessable income, rejecting the claim that it's agricultural income.
The Appellate Assistant Commissioner and the Income Tax Appellate Tribunal confirmed the assessment.
The Tribunal referred questions of law to the High Court, one concerning whether the income qualifies as agricultural income.
The High Court ruled in favour of the respondent, stating that human labor and skill spent on forest growth qualifies it as agricultural income.
The Revenue appealed to the Supreme Court, questioning whether income from the forest qualifies as agricultural income under the Income Tax Act.
ISSUE
Whether income from forest trees that have been in existence for about 150 years, originally of spontaneous growth, can be exempted as agricultural income within the meaning of Section 2(1) of the Indian Income Tax Act, 1922.
RULE
To claim an exemption under sec 4(3) (viii) of the Income Tax Act as agriculture income, the assessee must satisfy that the income is derived by performing some of the basic primary operations like cultivation and similar operations on that agricultural land apart from the subsequent operations.
HELD
The courts have taken varying stances on what constitutes agriculture. Some interpretations focus on basic agricultural operations like tilling the land, sowing seeds, and planting. Others adopt a broader view, including activities related to land management and product preservation.
In Mustafa Ali Khan v. Commissioner of Income-tax, U.P. Ajmer and Ajmer Merwara (1948) 16 ITR 330 the court held, no exemption under the Income-tax Act if the land isn't used for agricultural purposes with some measure of cultivation and expenditure of skill and labour. In this case, the forest trees were grown naturally and there was no contribution by any human agency to show the agricultural purpose.
In Pratap Singh v. Commissioner of Income Tax, U.P., C.P. and Berar [1952 – 22 ITR 1], the court held that mere preservation of spontaneous forest growth wasn't considered agricultural operations.
The definition of agricultural income requires both land use for agricultural purposes and income derived from agricultural operations.
Primarily agriculture refers to cultivating the land, including tilling, sowing, planting, and similar operations which are basic operations.
After the production of sprouts, subsequent operations like weeding, tending, pruning, cutting, and harvesting must be performed to foster growth and protect it from damage and to promote growth after basic operations.
To get the benefit of agricultural income it is necessary to show the presence of basic operations, only performing subsequent operations will not help.
In the present case, the forest is of spontaneous growth, but in the tribunal finding it is stated fact that the trees existed for about 150 years and some of them are denuded and have been replanted by the proprietors (assessee), which would be considered as agricultural income.
As no proper enquiry has been conducted to determine which portion of the income is non-agricultural, a substantial portion of the income must have been derived from trees planted by the proprietors(assessee) themselves. Therefore, the appeal is dismissed with costs.