Agricultural income turns on immediate source of receipt, with forest-tree sale and malikana rejected but lease rent accepted.

Income is agricultural only if its immediate and effective source is land; sale proceeds from forest trees growing naturally on land assessed to revenue were held not to satisfy that test. Malikana fixed by historical settlement and payable of cultivation or profits was treated as arising from the settlement obligation, not from land, and was therefore not agricultural income. By contrast, the annual receipt of Rs. 1,07,000 under the liquidation scheme was accepted on the lease as rent and treated as agricultural income, with no part separately carved out as interest, damages, or compensation. The source of each receipt, rather than its remote origin, was decisive.

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Issues: (i) Whether income from the sale of forest trees growing naturally on land assessed to land revenue is agricultural income exempt from tax; (ii) Whether the malikana received by the assessee in the facts of the case is agricultural income exempt from tax; (iii) Whether the sum of Rs. 1,07,000 received under the liquidation scheme is agricultural income; (iv) Whether the interest component of that receipt is damages, compensation, or interest and is therefore not assessable.

Issue (i): Whether income from the sale of forest trees growing naturally on land assessed to land revenue is agricultural income exempt from tax.

Analysis: The definition of agricultural income requires income to be derived from land in the manner contemplated by the Act. Income from the sale of trees growing spontaneously on land, even where the land is assessed to land revenue, does not satisfy that test merely because the trees stand on agricultural land.

Conclusion: The issue was answered against the assessee. Such income was held not to be agricultural income.

Issue (ii): Whether the malikana received by the assessee in the facts of the case is agricultural income exempt from tax.

Analysis: The malikana in question was not ordinary malikana arising from landlord-tenant relations. It originated in a historical and settlement arrangement, was fixed by decree, remained unalterable, and was payable irrespective of the use, profits, or actual agricultural character of the villages. The decisive consideration was that its source had ceased to be land and had become the settlement obligation itself. A payment merely charged on land is not, for that reason alone, income derived from land.

Conclusion: The issue was answered against the assessee. The malikana was held not to be agricultural income.

Issue (iii): Whether the sum of Rs. 1,07,000 received under the liquidation scheme is agricultural income.

Analysis: The annual receipt arose under a mortgage and lease arrangement carried out to implement the liquidation scheme. Looking at the operative documents, the amount was payable as rent under the lease and the Court declined to go behind that arrangement to recharacterise part of the receipt by reference to the underlying transaction. On the lease as executed, the receipt was treated as having the character of agricultural income for the purposes of the Act.

Conclusion: The issue was answered in favour of the assessee. The amount of Rs. 1,07,000 was held to be agricultural income.

Issue (iv): Whether the interest component of that receipt is damages, compensation, or interest and is therefore not assessable.

Analysis: The Court held that no part of the annual receipt could be dissected and treated as interest for tax purposes on the footing suggested by the revenue. The legal character had to be gathered from the lease arrangement as it stood, and on that basis no portion of the receipt was treated as interest, damages, or compensation independently assessable.

Conclusion: The issue was answered in favour of the assessee. No portion of the receipt was held to be assessable as interest, damages, or compensation.

Final Conclusion: The reference was answered by holding that the forest-tree income and the malikana were taxable, while the receipt of Rs. 1,07,000 under the liquidation scheme was agricultural income and no part of it was separately taxable as interest, damages, or compensation.

Ratio Decidendi: For income-tax purposes, a payment is agricultural income only if its immediate and effective source is land, and a receipt fixed by independent settlement or contractual arrangements, or a sum payable under a lease/mortgage structure as such, cannot be recharacterised by tracing it to an earlier or more remote source.

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