Teak plantation sale proceeds are revenue receipts, and earlier plantation costs can be deducted on commercial principles.

Receipts from the sale of teak trees planted for commercial income were treated as revenue, not capital, because the sale proceeds arose from the income-yielding plantation activity and the manner of uprooting did not change their character. Expenditure incurred in earlier years for planting and maintaining the plantation was held deductible on commercial principles, as it was wholly directed to earning the eventual agricultural income; only notional interest on the assessee's own funds was disallowed. The assessment was therefore to be recomputed, with the tree-sale receipts taxed as income and the plantation and maintenance costs allowed to the extent recognised.

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Issues: (i) Whether the receipts from sale of teak trees planted for the purpose of deriving income by sale of trees were capital receipts exempt from agricultural income-tax. (ii) Whether expenditure incurred in prior years for planting and maintaining the teak plantation was deductible in computing agricultural income.

Issue (i): Whether the receipts from sale of teak trees planted for the purpose of deriving income by sale of trees were capital receipts exempt from agricultural income-tax.

Analysis: The source of the receipt was not the realization of a capital asset merely because the trees were removed with roots. Where trees are planted with the object of deriving income by sale of the trees, the receipt from their sale is attributable to the income-yielding activity itself. The manner of removal does not alter the character of the receipt. The distinction drawn in cases concerning wild growth, shade trees, dead trees, or sale under special circumstances was held inapplicable.

Conclusion: The receipts were income and not capital, and question No. 1 was answered against the assessee.

Issue (ii): Whether expenditure incurred in prior years for planting and maintaining the teak plantation was deductible in computing agricultural income.

Analysis: Interest on the assessee's own notional use of funds was not an allowable deduction. However, expenditure on planting and maintaining the trees, though incurred in earlier years, was held to be revenue in nature because it was incurred wholly for deriving the eventual agricultural income from the plantation. The Court applied the principle that, in computing real profits, commercially relevant expenditure necessary to earn the income must be considered, even if incurred before the accounting year, where the venture is one whose profits are realized only on completion or upon disposal of the income-yielding asset.

Conclusion: The assessee was entitled to deduct Rs. 7,750 and Rs. 4,978.02 in computing assessable agricultural income for the assessment year 1963-64, and question No. 2 was answered in favour of the assessee to that extent.

Final Conclusion: The reference was answered partly against the assessee on the character of the tree-sale receipts and partly in her favour on the deductibility of plantation and maintenance expenditure, with the assessment to be recomputed accordingly.

Ratio Decidendi: Where trees are planted for the purpose of earning income by their sale, the sale proceeds are revenue receipts regardless of whether the trees are cut with roots; and expenditure incurred wholly for deriving such income is deductible on commercial principles even if incurred in earlier years, when it is necessary to ascertain the real profits of the venture.

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