2019 (5) TMI 843 - AT - Income Tax

Income from sale of spontaneous tree growth deemed capital receipt, not taxable per ITAT. Revenue's appeals dismissed.

The ITAT upheld the CIT(A)'s decision that income from the sale of spontaneous tree growth is a capital receipt and not taxable. The Tribunal considered ... Receipts from sale of spontaneous growth of trees - Capital receipt or income from other sources - non taxability of receipt - HELD THAT:- As relying on AMBAT ECHUKUTTY MENON [1979 (9) TMI 2 - SUPREME COURT] this issue was settled by the above judgment wherein it was held that receipts from sale of spontaneous growth of trees is a capital receipt not liable to tax. Even section 55(2)(a) has no relevance in the case of spontaneous growth of trees. See M/S. NATRAJ VERSUS DCIT, CIR. 10 AHMEDABAD. [2013 (1) TMI 970 - ITAT AHMEDABAD] The provisions of section 55(2)(a) cannot be applied to spontaneous growth of trees and is to be applied only to goodwill, trade mark, brand name, right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours etc. In the case of State of Kerala vs. Karimtharuvi Tea Estates Ltd. [1965 (12) TMI 36 - SUPREME COURT] held that High Court had confirmed that gravelia trees were grown and maintained for the sole purpose of providing shade to the tea bushes in the tea estates of the assessee. That such shade is essential for the proper cultivation of tea cannot be disputed; and hence, we consider it to be a part of the capital asset of the company and tea bushes themselves are the equipment of tea factories. Some of the gravelia trees became old and useless with the expiry of time and naturally to be cut for sale. In view of the above order of the Tribunal and the judgments of the Supreme Court, we are inclined to dismiss the grounds of appeals of the Revenue. Issues Involved:1. Taxability of income from the sale of spontaneous tree growth.2. Classification of income from the sale of spontaneous tree growth as business income or capital receipt.3. Relevance of various judicial precedents in determining the nature of income from spontaneous tree growth.Detailed Analysis:1. Taxability of Income from the Sale of Spontaneous Tree Growth:The primary issue revolves around whether the income derived from the sale of spontaneous tree growth should be taxable. The Assessing Officer (AO) had assessed this income as business income after allowing proportionate expenditure. However, the Commissioner of Income Tax (Appeals) [CIT(A)] ruled in favor of the assessee, following the precedent set by the ITAT in the case of Santhosh George vs. DCIT. The Tribunal had previously determined that receipts from the sale of spontaneous tree growth, which have no cost of acquisition, should be treated as capital receipts and thus not taxable.2. Classification of Income from the Sale of Spontaneous Tree Growth as Business Income or Capital Receipt:The Revenue argued that the income from the sale of spontaneous tree growth should be considered taxable under the inclusive definition of income as per Section 2(24) of the Income Tax Act. They cited various judgments, including the Supreme Court's decision in CIT vs. G.R. Karthikeyan, which emphasized the broad scope of the term 'income.' However, the assessee contended that the sale of spontaneously grown trees was incidental to their primary activity of plantation and was not conducted with a profit motive. They relied on several judicial precedents, including the Supreme Court's judgment in CIT vs. Ambat Echukutty Menon, which held that receipts from the sale of spontaneous growth of trees are capital receipts and not liable to tax.3. Relevance of Various Judicial Precedents:The CIT(A) and the ITAT relied on multiple judicial precedents to arrive at their decision. Key judgments included:- CIT vs. Ambat Echukutty Menon: The Supreme Court held that the sale of trees of spontaneous growth is a capital receipt and not taxable, emphasizing that the object of the sale was not profit generation but land clearance for cultivation.- Suman Tea & Plywood Industries (P) Ltd: The Calcutta High Court ruled that receipts from the sale of spontaneously grown trees should be treated as capital in nature and not taxable due to the absence of cost of acquisition.- B.C. Srinivasa Setty: The Supreme Court stated that assets with no cost of acquisition, like goodwill generated in a new business, cannot be subjected to capital gains tax.The ITAT concluded that the sale of trees grown spontaneously without any human aid should be treated as a capital receipt and not taxable. This conclusion was supported by the fact that the trees were sold to clear the land for further plantation activities, not as a profit-making venture. The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decision to delete the additions for both assessment years.Conclusion:The ITAT upheld the CIT(A)'s decision that the income from the sale of spontaneous tree growth is a capital receipt and not taxable. This decision was based on the absence of cost of acquisition and the incidental nature of the sale, supported by various judicial precedents. The appeals filed by the Revenue were dismissed.