Capital receipt treatment for compensation on removal of sandalwood trees where extraction destroyed the source of further growth.

Payment received from the forest department for sandalwood trees extracted from the assessee's land was treated as a capital receipt, not taxable income. The court reasoned that the trees were removed root and branch, destroying the source of further growth and affecting the capital structure rather than generating recurring income. The statutory scheme did not create any service obligation or remuneration nexus, and the amount was compensatory for the assessee's proprietary interest in the trees as an asset. On that basis, the receipt was held not chargeable to income-tax.

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Issues: Whether the amount received by the assessee from the forest department for sandalwood trees extracted from his land was a taxable revenue receipt or a capital receipt not liable to income-tax.

Analysis: The payment arose under the forest law and rules after the sandalwood trees had been cut and removed root and branch. The statutory scheme vested ownership of sandal trees in the State and imposed duties of preservation, but did not create any obligation on the landholder to render services for which the payment could be treated as remuneration. The receipt was not linked to any periodic or recurring source of income and did not represent income from the assessee's occupation as planter. The governing principle was that where trees are removed with roots and the source from which fresh growth could occur is destroyed, the realisation affects the capital structure and is not revenue. On that footing, the amount paid by the Government was compensation for the assessee's interest in the trees as an asset and constituted a distribution of proceeds of capital.

Conclusion: The receipt was a capital receipt and not taxable as income under the Income-tax Act, 1961.

Final Conclusion: The question referred was answered against the Revenue and in favour of the assessee, holding that the forest department payment was not chargeable to tax.

Ratio Decidendi: A payment received on the removal and disposal of trees as a capital asset, where the removal destroys the source of further growth and the payment is compensatory rather than remunerative, is a capital receipt and not taxable income.

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