Forest-tree sale receipts are taxable income, while interest on arrears of agricultural rent and cess remains exempt.

Receipts from the sale of spontaneously growing forest trees on land that remained intact in the assessee's ownership were treated as revenue income, because the sale yielded recurring produce from the land rather than a realisation of capital; the amounts were therefore taxable. Interest on arrears of rent and cess relating to agricultural lands was treated as intrinsically connected with agricultural operations and fell within agricultural income, so it remained exempt from tax.

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Issues: (i) Whether the assessee's net receipts from the sale of forest trees were taxable income or capital receipts; (ii) Whether interest on arrears of rent and cess relating to agricultural lands constituted agricultural income exempt from tax.

Issue (i): Whether the assessee's net receipts from the sale of forest trees were taxable income or capital receipts.

Analysis: The receipts arose from the sale of spontaneously growing forest trees on land that remained intact and continued to belong to the assessee. The sale did not exhaust or diminish any capital asset in the ownership of the assessee, and the recurring yield from the forest was treated as the product of the land rather than the realization of capital. The fact that the estate may have spent money on maintenance or improvement did not alter the character of the receipts from the sale of the trees.

Conclusion: The receipts were income liable to income-tax and not capital receipts, against the assessee.

Issue (ii): Whether interest on arrears of rent and cess relating to agricultural lands constituted agricultural income exempt from tax.

Analysis: Interest received on arrears of rent and cess relating to agricultural lands was treated as part of the agricultural yield connected with the land. The earlier decision of the Court on the same point was followed, and no reason was found to depart from that view. On that basis, the amount was brought within the statutory concept of agricultural income and exempted from tax.

Conclusion: The interest on arrears of rent and cess was agricultural income and exempt from tax, in favour of the assessee.

Final Conclusion: The reference was answered by holding the forest-tree receipts taxable, while the interest on arrears of rent and cess retained its exempt agricultural character.

Ratio Decidendi: Where the ownership of land continues intact and the sale of spontaneously growing forest trees merely yields recurring produce from that land, the proceeds are revenue in character; conversely, interest intrinsically connected with arrears of agricultural rent and cess is agricultural income for tax purposes.

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